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International Paper Company (IP): Hedge Funds In Wait-and-See Mode

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards International Paper Company (NYSE:IP) at the end of the second quarter and determine whether the smart money was really smart about this stock.

International Paper Company (NYSE:IP) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 29 hedge funds’ portfolios at the end of June. Our calculations also showed that IP isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as The Hartford Financial Services Group Inc (NYSE:HIG), Tyler Technologies, Inc. (NYSE:TYL), and ONEOK, Inc. (NYSE:OKE) to gather more data points. Our calculations also showed that IP isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Roger Ibbotson of Zebra Capital Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now let’s take a peek at the new hedge fund action encompassing International Paper Company (NYSE:IP).

What have hedge funds been doing with International Paper Company (NYSE:IP)?

Heading into the third quarter of 2020, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 31 hedge funds with a bullish position in IP a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Cliff Asness’s AQR Capital Management has the largest position in International Paper Company (NYSE:IP), worth close to $118.9 million, corresponding to 0.2% of its total 13F portfolio. The second largest stake is held by Renaissance Technologies, holding a $30.4 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish include Ken Griffin’s Citadel Investment Group, John Murphy’s Levin Easterly Partners and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Levin Easterly Partners allocated the biggest weight to International Paper Company (NYSE:IP), around 1.13% of its 13F portfolio. Game Creek Capital is also relatively very bullish on the stock, dishing out 0.5 percent of its 13F equity portfolio to IP.

Seeing as International Paper Company (NYSE:IP) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of funds that elected to cut their full holdings in the second quarter. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dropped the largest position of the 750 funds tracked by Insider Monkey, valued at close to $15.9 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also cut its stock, about $6.6 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as International Paper Company (NYSE:IP) but similarly valued. These stocks are The Hartford Financial Services Group Inc (NYSE:HIG), Tyler Technologies, Inc. (NYSE:TYL), ONEOK, Inc. (NYSE:OKE), Pembina Pipeline Corp (NYSE:PBA), Fifth Third Bancorp (NASDAQ:FITB), Ventas, Inc. (NYSE:VTR), and Zebra Technologies Corporation (NASDAQ:ZBRA). This group of stocks’ market caps resemble IP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HIG 39 917896 2
TYL 36 533929 6
OKE 25 117132 0
PBA 10 89252 -5
FITB 32 354887 2
VTR 21 167092 -4
ZBRA 38 788710 10
Average 28.7 424128 1.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.7 hedge funds with bullish positions and the average amount invested in these stocks was $424 million. That figure was $238 million in IP’s case. The Hartford Financial Services Group Inc (NYSE:HIG) is the most popular stock in this table. On the other hand Pembina Pipeline Corp (NYSE:PBA) is the least popular one with only 10 bullish hedge fund positions. International Paper Company (NYSE:IP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IP is 63.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Hedge funds were also right about betting on IP as the stock returned 17.5% during Q3 (through September 14th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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