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Hedge Funds Were Dumping The Clorox Company (CLX) Before The Coronavirus

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published 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 (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. At Insider Monkey, we pore over the filings of nearly 835 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of December 31. In this article, we will use that wealth of knowledge to determine whether or not The Clorox Company (NYSE:CLX) makes for a good investment right now.

Is The Clorox Company (NYSE:CLX) a buy here? The smart money is becoming less hopeful. The number of long hedge fund positions went down by 10 in recent months. Our calculations also showed that CLX isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). CLX was in 27 hedge funds’ portfolios at the end of December. There were 37 hedge funds in our database with CLX holdings at the end of the previous quarter.

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.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to go over the new hedge fund action encompassing The Clorox Company (NYSE:CLX).

What does smart money think about The Clorox Company (NYSE:CLX)?

Heading into the first quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -27% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CLX over the last 18 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Cedar Rock Capital, managed by Andy Brown, holds the largest position in The Clorox Company (NYSE:CLX). Cedar Rock Capital has a $420.4 million position in the stock, comprising 9.5% of its 13F portfolio. On Cedar Rock Capital’s heels is Cliff Asness of AQR Capital Management, with a $204 million position; 0.2% of its 13F portfolio is allocated to the company. Remaining hedge funds and institutional investors that are bullish contain Renaissance Technologies, David Harding’s Winton Capital Management and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Cedar Rock Capital allocated the biggest weight to The Clorox Company (NYSE:CLX), around 9.52% of its 13F portfolio. Ayrshire Capital Management is also relatively very bullish on the stock, dishing out 1.47 percent of its 13F equity portfolio to CLX.

Seeing as The Clorox Company (NYSE:CLX) has faced bearish sentiment from the smart money, we can see that there is a sect of hedgies that decided to sell off their full holdings last quarter. Intriguingly, Ray Dalio’s Bridgewater Associates dumped the biggest investment of all the hedgies watched by Insider Monkey, valued at about $27.4 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund said goodbye to about $13.6 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 10 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as The Clorox Company (NYSE:CLX) but similarly valued. These stocks are Cheniere Energy Partners LP (NYSE:CQP), Keysight Technologies Inc (NYSE:KEYS), Apollo Global Management, Inc. (NYSE:APO), and New Oriental Education & Tech Group Inc. (NYSE:EDU). This group of stocks’ market valuations are closest to CLX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CQP 7 19372 2
KEYS 49 1019974 -1
APO 29 2225310 5
EDU 50 1375166 12
Average 33.75 1159956 4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $1160 million. That figure was $864 million in CLX’s case. New Oriental Education & Tech Group Inc. (NYSE:EDU) is the most popular stock in this table. On the other hand Cheniere Energy Partners LP (NYSE:CQP) is the least popular one with only 7 bullish hedge fund positions. The Clorox Company (NYSE:CLX) 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 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on CLX as the stock returned 14.5% during the same time period and outperformed the market by an even larger margin.

5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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