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Was The Smart Money Right About Piling Into Dow Inc. (DOW)?

·5 min read

While the market driven by short-term sentiment influenced by the accommodative interest rate environment in the US, virus news and stimulus spending, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Dow Inc. (NYSE:DOW).

Dow Inc. (NYSE:DOW) investors should be aware of an increase in hedge fund interest recently. Dow Inc. (NYSE:DOW) was in 47 hedge funds' portfolios at the end of December. The all time high for this statistic was previously 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 42 hedge funds in our database with DOW holdings at the end of September. Our calculations also showed that DOW isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 124 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Pzena - Pzena Investment Management
Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we're going to take a look at the latest hedge fund action regarding Dow Inc. (NYSE:DOW).

Do Hedge Funds Think DOW Is A Good Stock To Buy Now?

Heading into the first quarter of 2021, a total of 47 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DOW over the last 22 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Dow Inc. (NYSE:DOW) was held by Pzena Investment Management, which reported holding $300.7 million worth of stock at the end of December. It was followed by Millennium Management with a $77.8 million position. Other investors bullish on the company included Arrowstreet Capital, Renaissance Technologies, and Falcon Edge Capital. In terms of the portfolio weights assigned to each position Albar Capital allocated the biggest weight to Dow Inc. (NYSE:DOW), around 9.21% of its 13F portfolio. Falcon Edge Capital is also relatively very bullish on the stock, dishing out 2 percent of its 13F equity portfolio to DOW.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Renaissance Technologies, established the largest position in Dow Inc. (NYSE:DOW). Renaissance Technologies had $50.1 million invested in the company at the end of the quarter. Richard Gerson and Navroz D. Udwadia's Falcon Edge Capital also initiated a $34.1 million position during the quarter. The following funds were also among the new DOW investors: Javier Velazquez's Albar Capital, Louis Bacon's Moore Global Investments, and Robert Bishop's Impala Asset Management.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Dow Inc. (NYSE:DOW) but similarly valued. These stocks are Carvana Co. (NYSE:CVNA), Baxter International Inc. (NYSE:BAX), CNOOC Limited (NYSE:CEO), Pinterest, Inc. (NYSE:PINS), Thomson Reuters Corporation (NYSE:TRI), Barrick Gold Corporation (NYSE:GOLD), and Public Storage (NYSE:PSA). This group of stocks' market valuations are similar to DOW's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVNA,63,7071672,10 BAX,42,2801959,-9 CEO,13,197301,-1 PINS,95,5840185,15 TRI,23,360755,4 GOLD,53,1751874,1 PSA,31,1038430,14 Average,45.7,2723168,4.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 45.7 hedge funds with bullish positions and the average amount invested in these stocks was $2723 million. That figure was $711 million in DOW's case. Pinterest, Inc. (NYSE:PINS) is the most popular stock in this table. On the other hand CNOOC Limited (NYSE:CEO) is the least popular one with only 13 bullish hedge fund positions. Dow Inc. (NYSE:DOW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DOW is 60.7. 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 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on DOW as the stock returned 13.9% since the end of Q4 (through 4/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.

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