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Did Hedge Funds Make The Right Call On VMware, Inc. (VMW) ?

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 first quarter. You can find articles 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 over the last 4.5 years and analyze what the smart money thinks of VMware, Inc. (NYSE:VMW) based on that data and determine whether they were really smart about the stock.

Is VMware, Inc. (NYSE:VMW) undervalued? Prominent investors were reducing their bets on the stock. The number of long hedge fund bets fell by 6 recently. Our calculations also showed that VMW 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’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.

Sander Gerber of Hudson Bay Capital

Sander Gerber of Hudson Bay Capital

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. Keeping this in mind we’re going to take a look at the key hedge fund action encompassing VMware, Inc. (NYSE:VMW).

Hedge fund activity in VMware, Inc. (NYSE:VMW)

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards VMW over the last 18 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of VMware, Inc. (NYSE:VMW), with a stake worth $93.4 million reported as of the end of September. Trailing Renaissance Technologies was GMT Capital, which amassed a stake valued at $67.8 million. Citadel Investment Group, AQR Capital Management, and Alyeska Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position GMT Capital allocated the biggest weight to VMware, Inc. (NYSE:VMW), around 3.8% of its 13F portfolio. Mondrian Capital is also relatively very bullish on the stock, dishing out 1.83 percent of its 13F equity portfolio to VMW.

Seeing as VMware, Inc. (NYSE:VMW) has witnessed falling interest from hedge fund managers, logic holds that there is a sect of funds who sold off their full holdings last quarter. At the top of the heap, Brandon Haley’s Holocene Advisors said goodbye to the biggest position of all the hedgies tracked by Insider Monkey, worth an estimated $53 million in stock, and Vikas Lunia’s Lunia Capital was right behind this move, as the fund dropped about $9 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 6 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to VMware, Inc. (NYSE:VMW). These stocks are Chubb Limited (NYSE:CB), The Bank of Nova Scotia (NYSE:BNS), Uber Technologies, Inc. (NYSE:UBER), and Takeda Pharmaceutical Company Limited (NYSE:TAK). This group of stocks’ market values are similar to VMW’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CB 33 691382 9
BNS 12 240173 -4
UBER 97 5084706 3
TAK 22 734533 -6
Average 41 1687699 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 41 hedge funds with bullish positions and the average amount invested in these stocks was $1688 million. That figure was $421 million in VMW’s case. Uber Technologies, Inc. (NYSE:UBER) is the most popular stock in this table. On the other hand The Bank of Nova Scotia (NYSE:BNS) is the least popular one with only 12 bullish hedge fund positions. VMware, Inc. (NYSE:VMW) is not the least popular stock in this group but hedge fund interest is still below average. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on VMW as the stock returned 27.9% during the second quarter and outperformed the market by an even larger margin.

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