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Were Hedge Funds Right About Deserting International Business Machines Corp. (IBM)?

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·6 min read
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  • IBM

In this article you are going to find out whether hedge funds think International Business Machines Corp. (NYSE:IBM) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Hedge fund interest in International Business Machines Corp. (NYSE:IBM) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that IBM isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). At the end of this article we will also compare IBM to other stocks including American Tower Corporation (REIT) (NASDAQ:AMAT), Raytheon Technologies Corp (NYSE:RTX), and The Goldman Sachs Group, Inc. (NYSE:GS) to get a better sense of its popularity.

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 79 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.

Billionaire David Siegel's Top 10 Stock Picks
Billionaire David Siegel's Top 10 Stock Picks

David Siegel of Two Sigma Advisors

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV 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 let's take a gander at the fresh hedge fund action encompassing International Business Machines Corp. (NYSE:IBM).

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

At Q2's end, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards IBM over the last 24 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.

The largest stake in International Business Machines Corp. (NYSE:IBM) was held by Arrowstreet Capital, which reported holding $508.4 million worth of stock at the end of June. It was followed by Citadel Investment Group with a $475.7 million position. Other investors bullish on the company included Masters Capital Management, AQR Capital Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Masters Capital Management allocated the biggest weight to International Business Machines Corp. (NYSE:IBM), around 8.65% of its 13F portfolio. Beddow Capital Management is also relatively very bullish on the stock, dishing out 3.51 percent of its 13F equity portfolio to IBM.

Seeing as International Business Machines Corp. (NYSE:IBM) has experienced falling interest from the smart money, we can see that there lies a certain "tier" of fund managers that slashed their full holdings heading into Q3. Interestingly, Donald Sussman's Paloma Partners dropped the biggest investment of the 750 funds tracked by Insider Monkey, valued at an estimated $3.5 million in stock, and David Costen Haley's HBK Investments was right behind this move, as the fund sold off about $1.4 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's also examine hedge fund activity in other stocks similar to International Business Machines Corp. (NYSE:IBM). These stocks are Applied Materials, Inc. (NASDAQ:AMAT), Raytheon Technologies Corp (NYSE:RTX), The Goldman Sachs Group, Inc. (NYSE:GS), The Toronto-Dominion Bank (NYSE:TD), JD.Com Inc (NASDAQ:JD), American Tower Corporation (REIT) (NYSE:AMT), and Sony Group Corp (NYSE:SONY). This group of stocks' market caps resemble IBM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMAT,73,4594094,-5 RTX,53,2112283,-5 GS,61,5183843,-16 TD,17,303083,-2 JD,76,10697800,1 AMT,55,4720340,-3 SONY,20,409056,-7 Average,50.7,4002928,-5.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.7 hedge funds with bullish positions and the average amount invested in these stocks was $4003 million. That figure was $1374 million in IBM's case. JD.Com Inc (NASDAQ:JD) is the most popular stock in this table. On the other hand The Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 17 bullish hedge fund positions. International Business Machines Corp. (NYSE:IBM) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for IBM is 44.9. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and surpassed the market again by 3.1 percentage points. Unfortunately IBM wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); IBM investors were disappointed as the stock returned -10.8% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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