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How Did Canadian Pacific Railway Limited (CP) Compare Against Hedge Fund Darlings in 2019?

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about Canadian Pacific Railway Limited (NYSE:CP)?

Canadian Pacific Railway Limited (NYSE:CP) was in 31 hedge funds’ portfolios at the end of the third quarter of 2019. CP has seen an increase in enthusiasm from smart money of late. There were 30 hedge funds in our database with CP holdings at the end of the previous quarter. Our calculations also showed that CP isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 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. 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.

John Armitage Egerton Capital

John Armitage of Egerton Capital

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to take a look at the recent hedge fund action encompassing Canadian Pacific Railway Limited (NYSE:CP).

What does smart money think about Canadian Pacific Railway Limited (NYSE:CP)?

Heading into the fourth quarter of 2019, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CP over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CP A Good Stock To Buy?

The largest stake in Canadian Pacific Railway Limited (NYSE:CP) was held by Egerton Capital Limited, which reported holding $782.1 million worth of stock at the end of September. It was followed by Lone Pine Capital with a $416 million position. Other investors bullish on the company included Arrowstreet Capital, Holocene Advisors, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Egerton Capital Limited allocated the biggest weight to Canadian Pacific Railway Limited (NYSE:CP), around 5.6% of its 13F portfolio. Signition LP is also relatively very bullish on the stock, setting aside 4.46 percent of its 13F equity portfolio to CP.

Consequently, specific money managers have been driving this bullishness. Gotham Asset Management, managed by Joel Greenblatt, established the biggest position in Canadian Pacific Railway Limited (NYSE:CP). Gotham Asset Management had $6.6 million invested in the company at the end of the quarter. Sara Nainzadeh’s Centenus Global Management also initiated a $5.6 million position during the quarter. The other funds with brand new CP positions are Benjamin A. Smith’s Laurion Capital Management, Donald Sussman’s Paloma Partners, and Benjamin A. Smith’s Laurion Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Canadian Pacific Railway Limited (NYSE:CP) but similarly valued. We will take a look at Royal Bank of Scotland Group plc (NYSE:RBS), Randgold Resources Ltd. (NASDAQ:GOLD), Credit Suisse Group AG (NYSE:CS), and SunTrust Banks, Inc. (NYSE:STI). This group of stocks’ market valuations are closest to CP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RBS 5 29381 -1
GOLD 42 1443824 3
CS 14 226949 3
STI 31 1100197 0
Average 23 700088 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $700 million. That figure was $1781 million in CP’s case. Randgold Resources Ltd. (NASDAQ:GOLD) is the most popular stock in this table. On the other hand Royal Bank of Scotland Group plc (NYSE:RBS) is the least popular one with only 5 bullish hedge fund positions. Canadian Pacific Railway Limited (NYSE:CP) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on CP as the stock returned 45.2% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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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