At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards The Sherwin-Williams Company (NYSE:SHW) at the end of the second quarter and determine whether the smart money was really smart about this stock.
The Sherwin-Williams Company (NYSE:SHW) investors should be aware of a decrease in hedge fund sentiment of late. The Sherwin-Williams Company (NYSE:SHW) was in 53 hedge funds' portfolios at the end of June. The all time high for this statistics is 57. Our calculations also showed that SHW isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
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 S&P 500 ETFs by more than 56 percentage points since March 2017 (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 stocks that are in our short portfolio.
Richard Chilton of Chilton Investment Company
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we're going to view the key hedge fund action regarding The Sherwin-Williams Company (NYSE:SHW).
How have hedgies been trading The Sherwin-Williams Company (NYSE:SHW)?
At the end of the second quarter, a total of 53 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the first quarter of 2020. By comparison, 40 hedge funds held shares or bullish call options in SHW a year ago. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Farallon Capital has the biggest position in The Sherwin-Williams Company (NYSE:SHW), worth close to $258.9 million, amounting to 2.1% of its total 13F portfolio. Coming in second is Chilton Investment Company, managed by Richard Chilton, which holds a $236.6 million position; the fund has 7.8% of its 13F portfolio invested in the stock. Other peers with similar optimism comprise Andreas Halvorsen's Viking Global, Ric Dillon's Diamond Hill Capital and John Overdeck and David Siegel's Two Sigma Advisors. In terms of the portfolio weights assigned to each position Chilton Investment Company allocated the biggest weight to The Sherwin-Williams Company (NYSE:SHW), around 7.81% of its 13F portfolio. Bristol Gate Capital Partners is also relatively very bullish on the stock, setting aside 4.53 percent of its 13F equity portfolio to SHW.
Judging by the fact that The Sherwin-Williams Company (NYSE:SHW) has faced declining sentiment from hedge fund managers, logic holds that there lies a certain "tier" of money managers who sold off their entire stakes last quarter. At the top of the heap, Dan Loeb's Third Point dumped the largest position of all the hedgies tracked by Insider Monkey, comprising close to $68.9 million in stock, and Brandon Haley's Holocene Advisors was right behind this move, as the fund dropped about $34.5 million worth. These moves are important to note, as total hedge fund interest was cut by 4 funds last quarter.
Let's now review hedge fund activity in other stocks similar to The Sherwin-Williams Company (NYSE:SHW). We will take a look at Autodesk, Inc. (NASDAQ:ADSK), Brookfield Asset Management Inc. (NYSE:BAM), Moody's Corporation (NYSE:MCO), Humana Inc (NYSE:HUM), Northrop Grumman Corporation (NYSE:NOC), Global Payments Inc (NYSE:GPN), and Sea Limited (NYSE:SE). This group of stocks' market caps resemble SHW's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ADSK,67,3014972,2 BAM,33,1001293,-4 MCO,61,10770558,11 HUM,73,4697967,3 NOC,47,990004,2 GPN,66,3311740,-1 SE,82,6358325,6 Average,61.3,4306408,2.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 61.3 hedge funds with bullish positions and the average amount invested in these stocks was $4306 million. That figure was $1831 million in SHW's case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand Brookfield Asset Management Inc. (NYSE:BAM) is the least popular one with only 33 bullish hedge fund positions. The Sherwin-Williams Company (NYSE:SHW) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SHW is 49.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and beat the market by 23.2 percentage points. A small number of hedge funds were also right about betting on SHW, though not to the same extent, as the stock returned 16.4% during the first two months of Q3 and outperformed the market.
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Disclosure: None. This article was originally published at Insider Monkey.