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VMware, Inc. (VMW): Hedge Funds Are In Wait-and-See Mode

Asma UL Husna

"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards VMware, Inc. (NYSE:VMW).

Is VMware, Inc. (NYSE:VMW) ready to rally soon? The smart money is taking a bullish view. The number of bullish hedge fund bets advanced by 1 recently. 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 below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_256989" align="aligncenter" width="450"] Dmitry Balyasny of Balyasny Asset Managemnet[/caption]

Dmitry Balyasny of Balyasny Asset Managemnet

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the fresh hedge fund action encompassing VMware, Inc. (NYSE:VMW).

What does smart money think about VMware, Inc. (NYSE:VMW)?

At Q3's end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the previous quarter. By comparison, 38 hedge funds held shares or bullish call options in VMW a year ago. With hedge funds' capital changing hands, there exists a few notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

VMW_dec2019

More specifically, Renaissance Technologies was the largest shareholder of VMware, Inc. (NYSE:VMW), with a stake worth $475.3 million reported as of the end of September. Trailing Renaissance Technologies was AQR Capital Management, which amassed a stake valued at $126.2 million. Two Sigma Advisors, Alyeska Investment Group, and Marshall Wace 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 Mondrian Capital allocated the biggest weight to VMware, Inc. (NYSE:VMW), around 3.26% of its portfolio. Lunia Capital is also relatively very bullish on the stock, designating 2.71 percent of its 13F equity portfolio to VMW.

As one would reasonably expect, key hedge funds were leading the bulls' herd. Alyeska Investment Group, managed by Anand Parekh, initiated the most outsized position in VMware, Inc. (NYSE:VMW). Alyeska Investment Group had $70.6 million invested in the company at the end of the quarter. Brandon Haley's Holocene Advisors also initiated a $25.1 million position during the quarter. The other funds with brand new VMW positions are Dmitry Balyasny's Balyasny Asset Management, Vikas Lunia's Lunia Capital, and Parsa Kiai's Steamboat Capital Partners.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as VMware, Inc. (NYSE:VMW) but similarly valued. These stocks are S&P Global Inc. (NYSE:SPGI), Zoetis Inc (NYSE:ZTS), Vale SA (NYSE:VALE), and The Blackstone Group Inc. (NYSE:BX). All of these stocks' market caps match VMW's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SPGI,69,3925199,11 ZTS,46,2229489,6 VALE,28,1453835,7 BX,41,1571733,11 Average,46,2295064,8.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $2295 million. That figure was $985 million in VMW's case. S&P Global Inc. (NYSE:SPGI) is the most popular stock in this table. On the other hand Vale SA (NYSE:VALE) is the least popular one with only 28 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. 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 3.7% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.

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

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