We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The 800+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the fourth quarter, which unveil their equity positions as of December 31. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Canadian Pacific Railway Limited (NYSE:CP).
Canadian Pacific Railway Limited (NYSE:CP) was in 29 hedge funds’ portfolios at the end of December. CP investors should be aware of a decrease in hedge fund interest lately. There were 33 hedge funds in our database with CP positions 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 Q4 rankings and see the video below for Q3 rankings).
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 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.
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 let’s analyze the latest hedge fund action surrounding Canadian Pacific Railway Limited (NYSE:CP).
What have hedge funds been doing with Canadian Pacific Railway Limited (NYSE:CP)?
At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from one quarter earlier. On the other hand, there were a total of 40 hedge funds with a bullish position in CP a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Canadian Pacific Railway Limited (NYSE:CP) was held by Egerton Capital Limited, which reported holding $693.9 million worth of stock at the end of September. It was followed by Lone Pine Capital with a $476.8 million position. Other investors bullish on the company included Suvretta Capital Management, Millennium Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Heronetta Management allocated the biggest weight to Canadian Pacific Railway Limited (NYSE:CP), around 5.05% of its 13F portfolio. Egerton Capital Limited is also relatively very bullish on the stock, earmarking 4.97 percent of its 13F equity portfolio to CP.
Judging by the fact that Canadian Pacific Railway Limited (NYSE:CP) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of fund managers that decided to sell off their full holdings heading into Q4. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the biggest investment of all the hedgies tracked by Insider Monkey, comprising an estimated $235.5 million in stock. Mark Kingdon’s fund, Kingdon Capital, also dumped its stock, about $15.1 million worth. These moves are important to note, as total hedge fund interest was cut by 4 funds heading into Q4.
Let’s now take a look at hedge fund activity in other stocks similar to Canadian Pacific Railway Limited (NYSE:CP). We will take a look at Carnival Corporation & Plc (NYSE:CCL), Energy Transfer L.P. (NYSE:ET), Monster Beverage Corp (NASDAQ:MNST), and Carnival Corporation & Plc (NYSE:CUK). This group of stocks’ market valuations resemble CP’s market valuation.
|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 32.25 hedge funds with bullish positions and the average amount invested in these stocks was $1325 million. That figure was $1760 million in CP’s case. Monster Beverage Corp (NASDAQ:MNST) is the most popular stock in this table. On the other hand Carnival Corporation & Plc (NYSE:CUK) is the least popular one with only 14 bullish hedge fund positions. Canadian Pacific Railway Limited (NYSE:CP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately CP wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CP investors were disappointed as the stock returned -14.8% during the same time period 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 most of these stocks already outperformed the market in Q1.
Disclosure: None. This article was originally published at Insider Monkey.