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Did Hedge Funds Make The Right Call On Canadian National Railway Company (CNI) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Canadian National Railway Company (NYSE:CNI) and determine whether hedge funds had an edge regarding this stock.

Canadian National Railway Company (NYSE:CNI) has experienced a decrease in hedge fund sentiment recently. Our calculations also showed that CNI isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Blair Levinsky of Waratah Capital Advisors

Blair Levinsky of Waratah Capital Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to analyze the latest hedge fund action encompassing Canadian National Railway Company (NYSE:CNI).

What does smart money think about Canadian National Railway Company (NYSE:CNI)?

At the end of the first quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in CNI a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Canadian National Railway Company (NYSE:CNI) was held by Bill & Melinda Gates Foundation Trust, which reported holding $1329.6 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $145.5 million position. Other investors bullish on the company included D E Shaw, Citadel Investment Group, and Bridgewater Associates. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Canadian National Railway Company (NYSE:CNI), around 7.66% of its 13F portfolio. Heronetta Management is also relatively very bullish on the stock, dishing out 6.96 percent of its 13F equity portfolio to CNI.

Since Canadian National Railway Company (NYSE:CNI) has faced falling interest from the entirety of the hedge funds we track, we can see that there is a sect of hedgies that elected to cut their entire stakes by the end of the first quarter. It’s worth mentioning that Zach Schreiber’s Point State Capital said goodbye to the largest position of the “upper crust” of funds followed by Insider Monkey, worth close to $2.5 million in stock, and Ian Cumming and Joseph Steinberg’s Leucadia National was right behind this move, as the fund sold off about $1.7 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 3 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Canadian National Railway Company (NYSE:CNI). We will take a look at Booking Holdings Inc. (NASDAQ:BKNG), Biogen Inc. (NASDAQ:BIIB), The Blackstone Group Inc. (NYSE:BX), and ServiceNow Inc (NYSE:NOW). All of these stocks’ market caps match CNI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BKNG 90 4914673 16
BIIB 70 4497544 9
BX 49 1523046 2
NOW 85 3985632 10
Average 73.5 3730224 9.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 73.5 hedge funds with bullish positions and the average amount invested in these stocks was $3730 million. That figure was $1606 million in CNI’s case. Booking Holdings Inc. (NASDAQ:BKNG) is the most popular stock in this table. On the other hand The Blackstone Group Inc. (NYSE:BX) is the least popular one with only 49 bullish hedge fund positions. Compared to these stocks Canadian National Railway Company (NYSE:CNI) is even less popular than BX. Hedge funds dodged a bullet by taking a bearish stance towards CNI. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but managed to beat the market by 15.5 percentage points. Unfortunately CNI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); CNI investors were disappointed as the stock returned 14.6% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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