Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 8 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Xerox Corporation (NYSE:XRX).
Xerox Corporation (NYSE:XRX) shareholders have witnessed a decrease in activity from the world's largest hedge funds in recent months. Our calculations also showed that xrx isn't among the 30 most popular stocks among hedge funds.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
[caption id="attachment_30621" align="aligncenter" width="487"] Cliff Asness of AQR Capital Management[/caption]
We're going to take a gander at the fresh hedge fund action encompassing Xerox Corporation (NYSE:XRX).
How have hedgies been trading Xerox Corporation (NYSE:XRX)?
At Q1's end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards XRX over the last 15 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Icahn Capital LP, managed by Carl Icahn, holds the number one position in Xerox Corporation (NYSE:XRX). Icahn Capital LP has a $750.1 million position in the stock, comprising 3.1% of its 13F portfolio. Sitting at the No. 2 spot is Cliff Asness of AQR Capital Management, with a $193.1 million position; 0.2% of its 13F portfolio is allocated to the stock. Other peers that hold long positions contain Ken Griffin's Citadel Investment Group, John Overdeck and David Siegel's Two Sigma Advisors and Bernard Horn's Polaris Capital Management.
Judging by the fact that Xerox Corporation (NYSE:XRX) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there lies a certain "tier" of hedgies who sold off their full holdings in the third quarter. At the top of the heap, Manoneet Singh's Kavi Asset Management dumped the biggest stake of the "upper crust" of funds tracked by Insider Monkey, valued at about $75.3 million in stock. James Dinan's fund, York Capital Management, also dropped its stock, about $31.8 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 11 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Xerox Corporation (NYSE:XRX) but similarly valued. These stocks are Ares Capital Corporation (NASDAQ:ARCC), News Corp (NASDAQ:NWS), The Toro Company (NYSE:TTC), and TIM Participacoes SA (NYSE:TSU). This group of stocks' market valuations are similar to XRX's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ARCC,22,261488,-4 NWS,10,36380,-3 TTC,16,577386,-5 TSU,16,341506,2 Average,16,304190,-2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $304 million. That figure was $1379 million in XRX's case. Ares Capital Corporation (NASDAQ:ARCC) is the most popular stock in this table. On the other hand News Corp (NASDAQ:NWS) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Xerox Corporation (NYSE:XRX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately XRX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on XRX were disappointed as the stock returned -1.3% during the same period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.