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Dow Inc. (DOW) Fell Out Of Favor With Hedge Funds

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 Dow Inc. (NYSE:DOW) and determine whether hedge funds had an edge regarding this stock.

Dow Inc. (NYSE:DOW) investors should be aware of a decrease in support from the world’s most elite money managers in recent months. Dow Inc. (NYSE:DOW) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 38. There were 38 hedge funds in our database with DOW positions at the end of the first quarter. Our calculations also showed that DOW 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.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover 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 and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s review the key hedge fund action surrounding Dow Inc. (NYSE:DOW).

What does smart money think about Dow Inc. (NYSE:DOW)?

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the first quarter of 2020. On the other hand, there were a total of 33 hedge funds with a bullish position in DOW 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.

Is DOW A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Pzena Investment Management, managed by Richard S. Pzena, holds the most valuable position in Dow Inc. (NYSE:DOW). Pzena Investment Management has a $262 million position in the stock, comprising 1.7% of its 13F portfolio. The second largest stake is held by Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $70.3 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism contain Ken Griffin’s Citadel Investment Group, Ken Griffin’s Citadel Investment Group and David Harding’s Winton Capital Management. In terms of the portfolio weights assigned to each position Appian Way Asset Management allocated the biggest weight to Dow Inc. (NYSE:DOW), around 2.27% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, designating 1.71 percent of its 13F equity portfolio to DOW.

Due to the fact that Dow Inc. (NYSE:DOW) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there exists a select few funds who sold off their full holdings heading into Q3. Intriguingly, Renaissance Technologies dumped the biggest investment of the “upper crust” of funds followed by Insider Monkey, valued at close to $28.8 million in stock, and Phill Gross and Robert Atchinson’s Adage Capital Management was right behind this move, as the fund sold off about $25 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 3 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to Dow Inc. (NYSE:DOW). These stocks are KLA Corporation (NASDAQ:KLAC), ICICI Bank Limited (NYSE:IBN), IHS Markit Ltd. (NASDAQ:INFO), Canadian Imperial Bank of Commerce (NYSE:CM), EOG Resources Inc (NYSE:EOG), Repros Therapeutics Inc (NASDAQ:RPRX), and Seattle Genetics, Inc. (NASDAQ:SGEN). This group of stocks’ market valuations are similar to DOW’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KLAC 37 661971 11
IBN 20 231584 -4
INFO 44 1532350 0
CM 6 158840 -4
EOG 45 696070 1
RPRX 24 2716389 24
SGEN 38 8430115 11
Average 30.6 2061046 5.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.6 hedge funds with bullish positions and the average amount invested in these stocks was $2061 million. That figure was $452 million in DOW’s case. EOG Resources Inc (NYSE:EOG) is the most popular stock in this table. On the other hand Canadian Imperial Bank of Commerce (NYSE:CM) is the least popular one with only 6 bullish hedge fund positions. Dow Inc. (NYSE:DOW) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DOW is 66.8. 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 positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately DOW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DOW were disappointed as the stock returned 12.4% during the same time period 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 many of these stocks already outperformed the market so far this year.

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