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Here’s What Hedge Funds Think About Selling Dow Inc. (DOW)

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Dow Inc. (NYSE:DOW).

Dow Inc. (NYSE:DOW) has experienced a decrease 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 Q3 rankings and see the video below for Q2 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Clint Carlson of Carlson Capital

Clint Carlson of Carlson Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s analyze the new hedge fund action encompassing Dow Inc. (NYSE:DOW).

What have hedge funds been doing with Dow Inc. (NYSE:DOW)?

At the end of the third quarter, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the second quarter of 2019. By comparison, 0 hedge funds held shares or bullish call options in DOW a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

DOW_dec2019

Among these funds, Carlson Capital held the most valuable stake in Dow Inc. (NYSE:DOW), which was worth $36.8 million at the end of the third quarter. On the second spot was Maverick Capital which amassed $34.8 million worth of shares. AQR Capital Management, Adage Capital Management, and Gotham Asset 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 Lucas Capital Management allocated the biggest weight to Dow Inc. (NYSE:DOW), around 2.26% of its portfolio. Bourgeon Capital is also relatively very bullish on the stock, dishing out 1.8 percent of its 13F equity portfolio to DOW.

Because Dow Inc. (NYSE:DOW) has experienced bearish sentiment from hedge fund managers, we can see that there was a specific group of fund managers who were dropping their positions entirely heading into Q4. Interestingly, John Murphy’s Levin Easterly Partners dropped the largest position of all the hedgies monitored by Insider Monkey, valued at about $59.9 million in stock, and Daniel Lascano’s Lomas Capital Management was right behind this move, as the fund dumped about $11.5 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 1 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Dow Inc. (NYSE:DOW). We will take a look at Valero Energy Corporation (NYSE:VLO), Ecopetrol S.A. (NYSE:EC), Johnson Controls International plc (NYSE:JCI), and Eaton Corporation plc (NYSE:ETN). All of these stocks’ market caps are similar to DOW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VLO 35 530355 0
EC 10 174854 0
JCI 22 598575 4
ETN 31 463777 -5
Average 24.5 441890 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.5 hedge funds with bullish positions and the average amount invested in these stocks was $442 million. That figure was $286 million in DOW’s case. Valero Energy Corporation (NYSE:VLO) is the most popular stock in this table. On the other hand Ecopetrol S.A. (NYSE:EC) is the least popular one with only 10 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on DOW as the stock returned 13.4% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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