Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Xylem Inc (NYSE:XYL).
Is Xylem Inc (NYSE:XYL) a buy right now? Money managers are getting less optimistic. The number of long hedge fund positions decreased by 5 recently. Our calculations also showed that XYL isn’t among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let’s analyze the latest hedge fund action surrounding Xylem Inc (NYSE:XYL).
How are hedge funds trading Xylem Inc (NYSE:XYL)?
At Q1’s end, a total of 13 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -28% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in XYL over the last 15 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Impax Asset Management held the most valuable stake in Xylem Inc (NYSE:XYL), which was worth $346 million at the end of the first quarter. On the second spot was GAMCO Investors which amassed $143.5 million worth of shares. Moreover, Locust Wood Capital Advisers, GLG Partners, and AQR Capital Management were also bullish on Xylem Inc (NYSE:XYL), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Xylem Inc (NYSE:XYL) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few money managers that elected to cut their entire stakes in the third quarter. At the top of the heap, Richard Chilton’s Chilton Investment Company dumped the largest investment of all the hedgies tracked by Insider Monkey, comprising about $59.6 million in stock. Steve Cohen’s fund, Point72 Asset Management, also said goodbye to its stock, about $13.1 million worth. These moves are important to note, as total hedge fund interest was cut by 5 funds in the third quarter.
Let’s check out hedge fund activity in other stocks similar to Xylem Inc (NYSE:XYL). We will take a look at CDW Corporation (NASDAQ:CDW), Hologic, Inc. (NASDAQ:HOLX), Franco-Nevada Corporation (NYSE:FNV), and Cincinnati Financial Corporation (NASDAQ:CINF). This group of stocks’ market values are closest to XYL’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $727 million. That figure was $521 million in XYL’s case. CDW Corporation (NASDAQ:CDW) is the most popular stock in this table. On the other hand Franco-Nevada Corporation (NYSE:FNV) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Xylem Inc (NYSE:XYL) is even less popular than FNV. Hedge funds dodged a bullet by taking a bearish stance towards XYL. Our calculations showed that the top 20 most popular hedge fund stocks returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately XYL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); XYL investors were disappointed as the stock returned 3.5% during the same time frame and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in the second quarter.
Disclosure: None. This article was originally published at Insider Monkey.