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Hedge Funds Are Warming Up To Dow Inc. (DOW)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Dow Inc. (NYSE:DOW).

Dow Inc. (NYSE:DOW) has seen an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that DOW 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 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 51 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, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the fresh hedge fund action encompassing Dow Inc. (NYSE:DOW).

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

Heading into the second quarter of 2020, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DOW over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Pzena Investment Management held the most valuable stake in Dow Inc. (NYSE:DOW), which was worth $133.6 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $78 million worth of shares. Renaissance Technologies, Adage Capital Management, and Marshall Wace LLP 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 Lucas Capital Management allocated the biggest weight to Dow Inc. (NYSE:DOW), around 1.25% of its 13F portfolio. Pzena Investment Management is also relatively very bullish on the stock, designating 1.01 percent of its 13F equity portfolio to DOW.

As aggregate interest increased, key money managers have been driving this bullishness. Pzena Investment Management, managed by Richard S. Pzena, initiated the biggest position in Dow Inc. (NYSE:DOW). Pzena Investment Management had $133.6 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $78 million position during the quarter. The other funds with brand new DOW positions are Renaissance Technologies, Phill Gross and Robert Atchinson’s Adage Capital Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Dow Inc. (NYSE:DOW) but similarly valued. These stocks are Otis Worldwide Corporation (NYSE:OTIS), FirstEnergy Corp. (NYSE:FE), The Clorox Company (NYSE:CLX), and American Water Works Company, Inc. (NYSE:AWK). This group of stocks’ market values are similar to DOW’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OTIS 4 13927 4
FE 44 1209775 4
CLX 41 2343925 14
AWK 30 633418 1
Average 29.75 1050261 5.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $1050 million. That figure was $376 million in DOW’s case. FirstEnergy Corp. (NYSE:FE) is the most popular stock in this table. On the other hand Otis Worldwide Corporation (NYSE:OTIS) is the least popular one with only 4 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 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 8.3% in 2020 through the end of May but still beat the market by 13.2 percentage points. Hedge funds were also right about betting on DOW as the stock returned 34.4% in Q2 (through the end of May) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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