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Hedge Funds Aren’t Crazy About HP Inc. (HPQ) Anymore

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 HP Inc. (NYSE:HPQ).

Is HP Inc. (NYSE:HPQ) a bargain? The best stock pickers are becoming less hopeful. The number of long hedge fund positions went down by 6 recently. Our calculations also showed that HPQ 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 44 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

BAUPOST GROUP Seth Klarman

Seth Klarman of Baupost Group

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this successful trader’s “corona catalyst plays“. 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. Keeping this in mind we’re going to check out the fresh hedge fund action regarding HP Inc. (NYSE:HPQ).

What does smart money think about HP Inc. (NYSE:HPQ)?

At the end of the first quarter, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in HPQ 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.

More specifically, Icahn Capital LP was the largest shareholder of HP Inc. (NYSE:HPQ), with a stake worth $1092 million reported as of the end of September. Trailing Icahn Capital LP was Baupost Group, which amassed a stake valued at $347.2 million. Magnetar Capital, D E Shaw, and Two Sigma Advisors 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 Icahn Capital LP allocated the biggest weight to HP Inc. (NYSE:HPQ), around 6.07% of its 13F portfolio. Baupost Group is also relatively very bullish on the stock, dishing out 5.13 percent of its 13F equity portfolio to HPQ.

Because HP Inc. (NYSE:HPQ) has experienced bearish sentiment from the smart money, we can see that there was a specific group of hedgies that slashed their entire stakes by the end of the third quarter. Interestingly, Renaissance Technologies dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, worth about $95.7 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also dumped its stock, about $32.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 6 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to HP Inc. (NYSE:HPQ). These stocks are Alcon Inc. (NYSE:ALC), AFLAC Incorporated (NYSE:AFL), DexCom, Inc. (NASDAQ:DXCM), and China Telecom Corporation Limited (NYSE:CHA). All of these stocks’ market caps resemble HPQ’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ALC 25 605394 1
AFL 32 387153 0
DXCM 58 1211152 18
CHA 5 28440 -2
Average 30 558035 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $558 million. That figure was $2181 million in HPQ’s case. DexCom, Inc. (NASDAQ:DXCM) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. HP Inc. (NYSE:HPQ) is not the most popular stock in this group but hedge fund interest is still above average. 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 8.3% in 2020 through the end of May but beat the market by 13.2 percentage points. Unfortunately HPQ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HPQ were disappointed as the stock returned -12.8% 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.