Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Xylem Inc (NYSE:XYL).
Xylem Inc (NYSE:XYL) was in 18 hedge funds' portfolios at the end of the fourth quarter of 2018. XYL has seen a decrease in support from the world's most elite money managers of late. There were 20 hedge funds in our database with XYL positions at the end of the previous quarter. Our calculations also showed that XYL 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 32 percentage points since May 2014 through March 12, 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.
Let's take a peek at the fresh hedge fund action encompassing Xylem Inc (NYSE:XYL).
How are hedge funds trading Xylem Inc (NYSE:XYL)?
At the end of the fourth quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards XYL over the last 14 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Ian Simm's Impax Asset Management has the biggest position in Xylem Inc (NYSE:XYL), worth close to $286.8 million, comprising 4.7% of its total 13F portfolio. Sitting at the No. 2 spot is GAMCO Investors, led by Mario Gabelli, holding a $130 million position; 1.1% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors with similar optimism include Richard Chilton's Chilton Investment Company, Israel Englander's Millennium Management and Steve Cohen's Point72 Asset Management.
Because Xylem Inc (NYSE:XYL) has faced falling interest from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of hedge funds who sold off their full holdings by the end of the third quarter. Interestingly, Alexander Mitchell's Scopus Asset Management sold off the largest stake of all the hedgies monitored by Insider Monkey, totaling close to $14.8 million in stock, and Matthew Tewksbury's Stevens Capital Management was right behind this move, as the fund sold off about $3.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds by the end of the third quarter.
Let's now review hedge fund activity in other stocks similar to Xylem Inc (NYSE:XYL). We will take a look at Cna Financial Corporation (NYSE:CNA), Henry Schein, Inc. (NASDAQ:HSIC), Garmin Ltd. (NASDAQ:GRMN), and ANSYS, Inc. (NASDAQ:ANSS). This group of stocks' market values match XYL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CNA,13,92731,-2 HSIC,27,1604886,5 GRMN,31,274275,4 ANSS,29,733810,3 Average,25,676426,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $676 million. That figure was $545 million in XYL's case. Garmin Ltd. (NASDAQ:GRMN) is the most popular stock in this table. On the other hand Cna Financial Corporation (NYSE:CNA) is the least popular one with only 13 bullish hedge fund positions. Xylem Inc (NYSE:XYL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on XYL, though not to the same extent, as the stock returned 15.3% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.