Is Canadian Pacific Railway Limited (CP) Going to Burn These Hedge Funds?

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards Canadian Pacific Railway Limited (NYSE:CP) to find out whether there were any major changes in hedge funds’ views.

Is Canadian Pacific Railway Limited (NYSE:CP) a buy right now? Money managers were getting less bullish. The number of long hedge fund bets went down by 8 in recent months. Canadian Pacific Railway Limited (NYSE:CP) was in 25 hedge funds’ portfolios at the end of June. The all time high for this statistic is 40. Our calculations also showed that CP isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 33 hedge funds in our database with CP holdings at the end of March.

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 79 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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now let’s take a peek at the latest hedge fund action encompassing Canadian Pacific Railway Limited (NYSE:CP).

Do Hedge Funds Think CP Is A Good Stock To Buy Now?

At the end of June, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CP over the last 24 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, TCI Fund Management, managed by Chris Hohn, holds the biggest position in Canadian Pacific Railway Limited (NYSE:CP). TCI Fund Management has a $4.2952 billion position in the stock, comprising 10.7% of its 13F portfolio. Coming in second is John Armitage of Egerton Capital Limited, with a $1.5138 billion position; the fund has 7.5% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism contain John Overdeck and David Siegel’s Two Sigma Advisors, Greg Poole’s Echo Street Capital Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position TCI Fund Management allocated the biggest weight to Canadian Pacific Railway Limited (NYSE:CP), around 10.71% of its 13F portfolio. Egerton Capital Limited is also relatively very bullish on the stock, earmarking 7.53 percent of its 13F equity portfolio to CP.

Due to the fact that Canadian Pacific Railway Limited (NYSE:CP) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of funds that slashed their entire stakes in the second quarter. At the top of the heap, Stephen J. Errico’s Locust Wood Capital Advisers dropped the largest investment of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $43.2 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also sold off its stock, about $19.6 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 8 funds in the second quarter.

Let’s go over 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 Canadian Imperial Bank of Commerce (NYSE:CM), Dollar General Corp. (NYSE:DG), Ferrari N.V. (NYSE:RACE), Newmont Corporation (NYSE:NEM), Pinterest, Inc. (NYSE:PINS), Keurig Dr Pepper Inc. (NASDAQ:KDP), and The Kraft Heinz Company (NASDAQ:KHC). This group of stocks’ market valuations are similar to CP’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $3138 million. That figure was $6354 million in CP’s case. Pinterest, Inc. (NYSE:PINS) is the most popular stock in this table. On the other hand Canadian Imperial Bank of Commerce (NYSE:CM) is the least popular one with only 15 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. Our overall hedge fund sentiment score for CP is 26.2. 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. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and surpassed the market again by 1.6 percentage points. Unfortunately CP wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); CP investors were disappointed as the stock returned -0.8% since the end of June (through 10/22) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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