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Were These Hedge Funds Right About Warming Up to IBM?

Reymerlyn Martin
·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 823 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 International Business Machines Corp. (NYSE:IBM) in this article.

International Business Machines Corp. (NYSE:IBM) has seen an increase in activity from the world's largest hedge funds recently. International Business Machines Corp. (NYSE:IBM) was in 46 hedge funds' portfolios at the end of June. The all time high for this statistics is 63. Our calculations also showed that IBM 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.

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 S&P 500 ETFs by more than 56 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Michael Lowenstein Kensico Capital
Michael Lowenstein Kensico Capital

Michael Lowenstein of Kensico Capital

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 we're going to take a gander at the latest hedge fund action regarding International Business Machines Corp. (NYSE:IBM).

Hedge fund activity in International Business Machines Corp. (NYSE:IBM)

Heading into the third quarter of 2020, a total of 46 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from the previous quarter. The graph below displays the number of hedge funds with bullish position in IBM over the last 20 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Is IBM A Good Stock To Buy?
Is IBM A Good Stock To Buy?

The largest stake in International Business Machines Corp. (NYSE:IBM) was held by Citadel Investment Group, which reported holding $218.9 million worth of stock at the end of September. It was followed by AQR Capital Management with a $212.9 million position. Other investors bullish on the company included Arrowstreet Capital, Kensico Capital, and Adage Capital Management. In terms of the portfolio weights assigned to each position Beddow Capital Management allocated the biggest weight to International Business Machines Corp. (NYSE:IBM), around 5.02% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, setting aside 3.08 percent of its 13F equity portfolio to IBM.

As aggregate interest increased, key hedge funds were leading the bulls' herd. Renaissance Technologies, founded by Jim Simons, established the most valuable position in International Business Machines Corp. (NYSE:IBM). Renaissance Technologies had $55 million invested in the company at the end of the quarter. Matthew Hulsizer's PEAK6 Capital Management also made a $21.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management, David Harding's Winton Capital Management, and Qing Li's Sciencast Management.

Let's also examine hedge fund activity in other stocks similar to International Business Machines Corp. (NYSE:IBM). We will take a look at Citigroup Inc. (NYSE:C), Charter Communications, Inc. (NASDAQ:CHTR), Wells Fargo & Company (NYSE:WFC), BHP Group (NYSE:BBL), The Boeing Company (NYSE:BA), PetroChina Company Limited (NYSE:PTR), and Pinduoduo Inc. (NASDAQ:PDD). This group of stocks' market caps are closest to IBM's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position C,96,6229205,10 CHTR,96,11227561,-8 WFC,86,10344809,10 BBL,22,919411,1 BA,39,1280437,-15 PTR,6,63660,-1 PDD,30,4149572,2 Average,53.6,4887808,-0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 53.6 hedge funds with bullish positions and the average amount invested in these stocks was $4888 million. That figure was $918 million in IBM's case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand PetroChina Company Limited (NYSE:PTR) is the least popular one with only 6 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 54.1. 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 IBM wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); IBM investors were disappointed as the stock returned -2.7% 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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