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Did Hedge Funds Make The Right Call On Xylem Inc (XYL) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtXylem Inc (NYSE:XYL) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Xylem Inc (NYSE:XYL) a bargain? Hedge funds were taking an optimistic view. The number of long hedge fund bets increased by 6 recently. Our calculations also showed that XYL 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). XYL was in 27 hedge funds’ portfolios at the end of the first quarter of 2020. There were 21 hedge funds in our database with XYL positions at the end of the previous quarter.

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.

Michael Hintze CQS Capital

Michael Hintze of CQS Cayman LP

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. Now let’s take a look at the recent hedge fund action surrounding Xylem Inc (NYSE:XYL).

How have hedgies been trading Xylem Inc (NYSE:XYL)?

At Q1’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 29% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards XYL over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Impax Asset Management held the most valuable stake in Xylem Inc (NYSE:XYL), which was worth $292.8 million at the end of the third quarter. On the second spot was GAMCO Investors which amassed $82.4 million worth of shares. Millennium Management, CQS Cayman LP, and Maverick Capital 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 Impax Asset Management allocated the biggest weight to Xylem Inc (NYSE:XYL), around 3.9% of its 13F portfolio. Albar Capital is also relatively very bullish on the stock, designating 2.88 percent of its 13F equity portfolio to XYL.

As one would reasonably expect, some big names were breaking ground themselves. Albar Capital, managed by Javier Velazquez, assembled the biggest position in Xylem Inc (NYSE:XYL). Albar Capital had $3 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also initiated a $2.9 million position during the quarter. The other funds with new positions in the stock are Louis Bacon’s Moore Global Investments, Greg Eisner’s Engineers Gate Manager, and Robert Vincent McHugh’s Jade Capital Advisors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Xylem Inc (NYSE:XYL) but similarly valued. We will take a look at Tyler Technologies, Inc. (NYSE:TYL), Sun Communities Inc (NYSE:SUI), Pioneer Natural Resources Company (NYSE:PXD), and Invitation Homes Inc. (NYSE:INVH). This group of stocks’ market values are similar to XYL’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TYL 30 405643 9
SUI 28 323201 -3
PXD 40 534807 -13
INVH 27 562992 -6
Average 31.25 456661 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $457 million. That figure was $428 million in XYL’s case. Pioneer Natural Resources Company (NYSE:PXD) is the most popular stock in this table. On the other hand Invitation Homes Inc. (NYSE:INVH) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Xylem Inc (NYSE:XYL) is even less popular than INVH. Hedge funds dodged a bullet by taking a bearish stance towards XYL. 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 XYL wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); XYL investors were disappointed as the stock returned 0.1% 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.