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Were Hedge Funds Right About Souring On Xerox Holdings (XRX)?

Abigail Fisher

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds' and successful investors' positions as of the end of the second quarter. You can find write-ups about an individual hedge fund's trades on numerous financial news websites. However, in this article we will take a look at their collective moves and analyze what the smart money thinks of Xerox Holdings Corporation (NYSE:XRX) based on that data.

Xerox Holdings Corporation (NYSE:XRX) was in 28 hedge funds' portfolios at the end of the second quarter of 2019. XRX shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 33 hedge funds in our database with XRX holdings at the end of the previous quarter. Our calculations also showed that XRX isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

XRX_oct2019

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to analyze the new hedge fund action regarding Xerox Holdings Corporation (NYSE:XRX).

Hedge fund activity in Xerox Holdings Corporation (NYSE:XRX)

Heading into the third quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards XRX over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Carl Icahn - Icahn Capital Lp

Among these funds, Icahn Capital LP held the most valuable stake in Xerox Holdings Corporation (NYSE:XRX), which was worth $830.6 million at the end of the second quarter. On the second spot was AQR Capital Management which amassed $258.3 million worth of shares. Moreover, Citadel Investment Group, Two Sigma Advisors, and Adage Capital Management were also bullish on Xerox Holdings Corporation (NYSE:XRX), allocating a large percentage of their portfolios to this stock.

Since Xerox Holdings Corporation (NYSE:XRX) has witnessed a decline in interest from the aggregate hedge fund industry, we can see that there lies a certain "tier" of hedge funds that slashed their entire stakes by the end of the second quarter. Interestingly, Bernard Horn's Polaris Capital Management cut the largest investment of the 750 funds followed by Insider Monkey, worth about $41.7 million in stock, and Kenneth Mario Garschina's Mason Capital Management was right behind this move, as the fund dropped about $38 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 5 funds by the end of the second quarter.

Let's now take a look at hedge fund activity in other stocks similar to Xerox Holdings Corporation (NYSE:XRX). We will take a look at Tata Motors Limited (NYSE:TTM), Carlisle Companies, Inc. (NYSE:CSL), Masimo Corporation (NASDAQ:MASI), and Bunge Limited (NYSE:BG). This group of stocks' market values resemble XRX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TTM,11,134501,-1 CSL,25,329481,3 MASI,28,350309,-6 BG,31,693472,-4 Average,23.75,376941,-2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $377 million. That figure was $1379 million in XRX's case. Bunge Limited (NYSE:BG) is the most popular stock in this table. On the other hand Tata Motors Limited (NYSE:TTM) is the least popular one with only 11 bullish hedge fund positions. Xerox Holdings Corporation (NYSE:XRX) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately XRX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on XRX were disappointed as the stock returned -14.8% during the third 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 many of these stocks already outperformed the market so far this year.

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

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