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Were Hedge Funds Right About Souring On 3M Company (MMM)?

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Asma UL Husna
·6 min read
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Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks aren't doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to 3M Company (NYSE:MMM) changed recently.

3M Company (NYSE:MMM) shareholders have witnessed a decrease in hedge fund sentiment recently. 3M Company (NYSE:MMM) was in 42 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 52. Our calculations also showed that MMM 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.

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 58 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.

Tom Gayner
Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Keeping this in mind let's take a gander at the fresh hedge fund action encompassing 3M Company (NYSE:MMM).

How have hedgies been trading 3M Company (NYSE:MMM)?

Heading into the third quarter of 2020, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. By comparison, 40 hedge funds held shares or bullish call options in MMM a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

The largest stake in 3M Company (NYSE:MMM) was held by Fisher Asset Management, which reported holding $690.9 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $153.5 million position. Other investors bullish on the company included AQR Capital Management, Renaissance Technologies, and Markel Gayner Asset Management. In terms of the portfolio weights assigned to each position Stevens Capital Management allocated the biggest weight to 3M Company (NYSE:MMM), around 1.71% of its 13F portfolio. Hourglass Capital is also relatively very bullish on the stock, designating 1.71 percent of its 13F equity portfolio to MMM.

Since 3M Company (NYSE:MMM) has witnessed declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedgies that elected to cut their positions entirely last quarter. Intriguingly, Anand Parekh's Alyeska Investment Group said goodbye to the largest stake of all the hedgies followed by Insider Monkey, totaling about $41.5 million in stock. Guy Shahar's fund, DSAM Partners, also said goodbye to its stock, about $22.3 million worth. These transactions are important to note, as total hedge fund interest fell by 2 funds last quarter.

Let's go over hedge fund activity in other stocks similar to 3M Company (NYSE:MMM). These stocks are British American Tobacco plc (NYSE:BTI), Starbucks Corporation (NASDAQ:SBUX), CVS Health Corporation (NYSE:CVS), Sony Corporation (NYSE:SNE), HDFC Bank Limited (NYSE:HDB), Fidelity National Information Services Inc. (NYSE:FIS), and BlackRock, Inc. (NYSE:BLK). This group of stocks' market caps are similar to MMM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BTI,11,824986,1 SBUX,54,2683454,-14 CVS,65,1136206,-6 SNE,28,598881,0 HDB,42,1177218,4 FIS,111,8173639,6 BLK,37,702091,-1 Average,49.7,2185211,-1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 49.7 hedge funds with bullish positions and the average amount invested in these stocks was $2185 million. That figure was $1038 million in MMM's case. Fidelity National Information Services Inc. (NYSE:FIS) is the most popular stock in this table. On the other hand British American Tobacco plc (NYSE:BTI) is the least popular one with only 11 bullish hedge fund positions. 3M Company (NYSE:MMM) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MMM is 42.7. 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. 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 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 30% in 2020 through October 23rd and surpassed the market by 21 percentage points. Unfortunately MMM wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MMM investors were disappointed as the stock returned 9.8% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 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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