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Is VMW A Good Stock To Buy According To Hedge Funds?

Abigail Fisher
·6 min read

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 817 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about VMware, Inc. (NYSE:VMW) in this article.

Is VMW a good stock to buy? VMware, Inc. (NYSE:VMW) shareholders have witnessed a decrease in enthusiasm from smart money recently. VMware, Inc. (NYSE:VMW) was in 31 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 43. There were 42 hedge funds in our database with VMW positions at the end of the second quarter. Our calculations also showed that VMW isn't among the 30 most popular stocks among hedge funds (click for Q3 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.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 66 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.

John Zaro of Bourgeon CapitalJohn Zaro

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. You can subscribe to our free daily newsletter on our website. Keeping this in mind let's take a glance at the fresh hedge fund action encompassing VMware, Inc. (NYSE:VMW).

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

At the end of September, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the previous quarter. By comparison, 37 hedge funds held shares or bullish call options in VMW a year ago. With hedgies' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Among these funds, Antipodes Partners held the most valuable stake in VMware, Inc. (NYSE:VMW), which was worth $101.2 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $90.7 million worth of shares. GMT Capital, Renaissance Technologies, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position GMT Capital allocated the biggest weight to VMware, Inc. (NYSE:VMW), around 5.29% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, setting aside 4.64 percent of its 13F equity portfolio to VMW.

Because VMware, Inc. (NYSE:VMW) has faced a decline in interest from the aggregate hedge fund industry, we can see that there exists a select few money managers that slashed their full holdings in the third quarter. At the top of the heap, Israel Englander's Millennium Management dropped the biggest investment of all the hedgies tracked by Insider Monkey, worth an estimated $39.5 million in stock, and Brandon Haley's Holocene Advisors was right behind this move, as the fund said goodbye to about $32.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 11 funds in the third quarter.

Let's now review hedge fund activity in other stocks similar to VMware, Inc. (NYSE:VMW). These stocks are CME Group Inc (NASDAQ:CME), Automatic Data Processing, Inc. (NASDAQ:ADP), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), CSX Corporation (NASDAQ:CSX), Enbridge Inc (NYSE:ENB), BP plc (NYSE:BP), and Infosys Limited (NYSE:INFY). All of these stocks' market caps resemble VMW's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CME,59,2577224,-1 ADP,42,1927660,-7 REGN,44,1404179,-5 CSX,58,3253140,12 ENB,25,342708,-3 BP,30,611924,3 INFY,22,1427968,-1 Average,40,1649258,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $1649 million. That figure was $469 million in VMW's case. CME Group Inc (NASDAQ:CME) is the most popular stock in this table. On the other hand Infosys Limited (NYSE:INFY) is the least popular one with only 22 bullish hedge fund positions. VMware, Inc. (NYSE:VMW) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for VMW is 27.8. 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. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and surpassed the market again by 16.4 percentage points. Unfortunately VMW wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); VMW investors were disappointed as the stock returned -2.5% since the end of September (through 12/18) 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 most of these stocks already outperformed the market in 2020.

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

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