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Hedge Funds Have Never Been This Bullish On The Sherwin-Williams (SHW)

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title “Recession is Imminent: We Need A Travel Ban NOW”. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

How do we determine whether The Sherwin-Williams Company (NYSE:SHW) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.

The Sherwin-Williams Company (NYSE:SHW) was in 55 hedge funds’ portfolios at the end of December. SHW has seen an increase in hedge fund sentiment in recent months. There were 51 hedge funds in our database with SHW positions at the end of the previous quarter. Our calculations also showed that SHW isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 41 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.

CHILTON INVESTMENT COMPANY

Richard Chilton of Chilton Investment Company

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind let’s take a look at the fresh hedge fund action regarding The Sherwin-Williams Company (NYSE:SHW).

How have hedgies been trading The Sherwin-Williams Company (NYSE:SHW)?

Heading into the first quarter of 2020, a total of 55 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 8% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in SHW over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Is SHW A Good Stock To Buy?

More specifically, Chilton Investment Company was the largest shareholder of The Sherwin-Williams Company (NYSE:SHW), with a stake worth $248.2 million reported as of the end of September. Trailing Chilton Investment Company was Farallon Capital, which amassed a stake valued at $214.6 million. Adage Capital Management, Two Sigma Advisors, and OZ Management 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 Chilton Investment Company allocated the biggest weight to The Sherwin-Williams Company (NYSE:SHW), around 7.94% of its 13F portfolio. Bristol Gate Capital Partners is also relatively very bullish on the stock, dishing out 4.42 percent of its 13F equity portfolio to SHW.

Consequently, some big names were breaking ground themselves. Gotham Asset Management, managed by Joel Greenblatt, created the most valuable position in The Sherwin-Williams Company (NYSE:SHW). Gotham Asset Management had $19.3 million invested in the company at the end of the quarter. Renaissance Technologies also made a $15.6 million investment in the stock during the quarter. The following funds were also among the new SHW investors: Peter Muller’s PDT Partners, Ray Dalio’s Bridgewater Associates, and Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as The Sherwin-Williams Company (NYSE:SHW) but similarly valued. These stocks are Biogen Inc. (NASDAQ:BIIB), Advanced Micro Devices, Inc. (NASDAQ:AMD), ServiceNow Inc (NYSE:NOW), and General Motors Company (NYSE:GM). All of these stocks’ market caps are closest to SHW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BIIB 61 5162729 8
AMD 53 1462695 -6
NOW 75 5035036 -17
GM 75 6531524 -1
Average 66 4547996 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 66 hedge funds with bullish positions and the average amount invested in these stocks was $4548 million. That figure was $1847 million in SHW’s case. ServiceNow Inc (NYSE:NOW) is the most popular stock in this table. On the other hand Advanced Micro Devices, Inc. (NASDAQ:AMD) is the least popular one with only 53 bullish hedge fund positions. The Sherwin-Williams Company (NYSE:SHW) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but still beat the market by 1.9 percentage points. A small number of hedge funds were also right about betting on SHW as the stock returned -9.4% during the same time period and outperformed the market by an even larger margin.

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

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