Do Hedge Funds Love Dow Inc. (DOW)?

Is Dow Inc. (NYSE:DOW) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Dow Inc. (NYSE:DOW) a buy right now? Hedge funds were reducing their bets on the stock. The number of bullish hedge fund positions fell by 6 recently. Dow Inc. (NYSE:DOW) was in 41 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 47. Our calculations also showed that DOW isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 47 hedge funds in our database with DOW holdings at the end of December.

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 115 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.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation, which is why we are checking out this inflation play. We go through lists like 10 best gold stocks to buy to identify promising stocks. 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 homepage. Keeping this in mind we’re going to take a look at the latest hedge fund action regarding Dow Inc. (NYSE:DOW).

Do Hedge Funds Think DOW Is A Good Stock To Buy Now?

At the end of March, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards DOW over the last 23 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Richard S. Pzena’s Pzena Investment Management has the number one position in Dow Inc. (NYSE:DOW), worth close to $346.6 million, corresponding to 1.4% of its total 13F portfolio. Coming in second is Citadel Investment Group, managed by Ken Griffin, which holds a $83.8 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism contain Israel Englander’s Millennium Management, Renaissance Technologies and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position Pzena Investment Management allocated the biggest weight to Dow Inc. (NYSE:DOW), around 1.41% of its 13F portfolio. Hourglass Capital is also relatively very bullish on the stock, designating 1.31 percent of its 13F equity portfolio to DOW.

Since Dow Inc. (NYSE:DOW) has witnessed bearish sentiment from the smart money, logic holds that there was a specific group of hedge funds who sold off their entire stakes by the end of the first quarter. Interestingly, Richard Gerson and Navroz D. Udwadia’s Falcon Edge Capital sold off the largest position of the 750 funds tracked by Insider Monkey, valued at close to $34.1 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also cut its stock, about $26.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 6 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Dow Inc. (NYSE:DOW) but similarly valued. We will take a look at Walgreens Boots Alliance Inc (NASDAQ:WBA), Kimberly Clark Corporation (NYSE:KMB), Pinterest, Inc. (NYSE:PINS), Las Vegas Sands Corp. (NYSE:LVS), Rocket Companies, Inc. (NYSE:RKT), Carvana Co. (NYSE:CVNA), and América Móvil, S.A.B. de C.V. (NYSE:AMX). This group of stocks’ market values match DOW’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WBA 41 1132820 5
KMB 31 1287433 -6
PINS 83 4189031 -12
LVS 62 2441021 -1
RKT 21 208014 5
CVNA 64 7536279 1
AMX 15 93823 -1
Average 45.3 2412632 -1.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 45.3 hedge funds with bullish positions and the average amount invested in these stocks was $2413 million. That figure was $718 million in DOW’s case. Pinterest, Inc. (NYSE:PINS) is the most popular stock in this table. On the other hand América Móvil, S.A.B. de C.V. (NYSE:AMX) is the least popular one with only 15 bullish hedge fund positions. Dow Inc. (NYSE:DOW) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for DOW is 44.3. 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. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.4% in 2021 through June 18th and surpassed the market again by 6.1 percentage points. Unfortunately DOW wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); DOW investors were disappointed as the stock returned -2.1% since the end of March (through 6/18) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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