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Should You Buy Canadian Pacific Railway Limited (CP)?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like 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 experienced an increase in support from the world’s most elite money managers in recent months. There were 30 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 Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

If you’d ask most investors, hedge funds are viewed as slow, old financial tools of the past. While there are over 8000 funds trading at present, Our researchers look at the aristocrats of this club, approximately 750 funds. These investment experts command most of the hedge fund industry’s total asset base, and by shadowing their best picks, Insider Monkey has unearthed many investment strategies that have historically exceeded the broader indices. Insider Monkey’s flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points annually since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

John Armitage Egerton Capital

John Armitage of Egerton Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the key hedge fund action regarding Canadian Pacific Railway Limited (NYSE:CP).

Hedge fund activity in 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 held long positions in this stock, a change of 3% from one quarter earlier. By comparison, 30 hedge funds held shares or bullish call options in CP a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

CP_dec2019

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 portfolio. Signition LP is also relatively very bullish on the stock, earmarking 4.46 percent of its 13F equity portfolio to CP.

Now, key hedge funds have been driving this bullishness. Gotham Asset Management, managed by Joel Greenblatt, assembled the most outsized 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 similar to Canadian Pacific Railway Limited (NYSE:CP). We will take a look at The Royal Bank of Scotland Group plc (NYSE:RBS), Barrick Gold Corporation (NYSE:GOLD), Credit Suisse Group AG (NYSE:CS), and SunTrust Banks, Inc. (NYSE:STI). 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
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. Barrick Gold Corporation (NYSE:GOLD) is the most popular stock in this table. On the other hand The 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on CP, though not to the same extent, as the stock returned 7.1% during the first two months of the fourth quarter and outperformed the market as well.

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

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