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Were These Hedge Funds Wrong About DXC Technology Company (DXC)?

Debasis Saha
·6 min read

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards DXC Technology Company (NYSE:DXC).

Is DXC Technology Company (NYSE:DXC) a bargain? The best stock pickers were cutting their exposure. The number of long hedge fund bets went down by 1 recently. DXC Technology Company (NYSE:DXC) was in 40 hedge funds' portfolios at the end of June. The all time high for this statistics is 60. Our calculations also showed that DXC 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.

Bart Baum of Ionic Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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. Now we're going to take a look at the key hedge fund action regarding DXC Technology Company (NYSE:DXC).

Hedge fund activity in DXC Technology Company (NYSE:DXC)

At the end of June, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DXC over the last 20 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Is DXC A Good Stock To Buy?
Is DXC A Good Stock To Buy?

The largest stake in DXC Technology Company (NYSE:DXC) was held by Glenview Capital, which reported holding $197.8 million worth of stock at the end of June. It was followed by Miller Value Partners with a $67 million position. Other investors bullish on the company included Maverick Capital, Arrowstreet Capital, and Atlantic Investment Management. In terms of the portfolio weights assigned to each position Atlantic Investment Management allocated the biggest weight to DXC Technology Company (NYSE:DXC), around 16.29% of its 13F portfolio. Glenview Capital is also relatively very bullish on the stock, designating 5.45 percent of its 13F equity portfolio to DXC.

Seeing as DXC Technology Company (NYSE:DXC) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there was a specific group of money managers who sold off their full holdings in the second quarter. At the top of the heap, Aaron Cowen's Suvretta Capital Management sold off the largest position of all the hedgies tracked by Insider Monkey, valued at close to $8.5 million in stock. Wallace Weitz's fund, Wallace R. Weitz & Co., also cut its stock, about $7.8 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds in the second quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as DXC Technology Company (NYSE:DXC) but similarly valued. We will take a look at Jefferies Financial Group Inc. (NYSE:JEF), Ashland Global Holdings Inc.. (NYSE:ASH), TerraForm Power Inc (NASDAQ:TERP), Exponent, Inc. (NASDAQ:EXPO), Pilgrim's Pride Corporation (NASDAQ:PPC), Allison Transmission Holdings Inc (NYSE:ALSN), and L Brands Inc (NYSE:LB). This group of stocks' market values resemble DXC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JEF,37,586275,7 ASH,32,976347,0 TERP,21,235830,4 EXPO,19,92487,2 PPC,15,59157,-3 ALSN,32,542648,5 LB,42,1472803,3 Average,28.3,566507,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.3 hedge funds with bullish positions and the average amount invested in these stocks was $567 million. That figure was $530 million in DXC's case. L Brands Inc (NYSE:LB) is the most popular stock in this table. On the other hand Pilgrim's Pride Corporation (NASDAQ:PPC) is the least popular one with only 15 bullish hedge fund positions. DXC Technology Company (NYSE:DXC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DXC is 70.3. 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. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on DXC as the stock returned 11.6% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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