Were Hedge Funds Right About Buying International Business Machines Corp. (IBM)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards International Business Machines Corp. (NYSE:IBM).

Is International Business Machines Corp. (NYSE:IBM) worth your attention right now? Money managers are taking an optimistic view. The number of long hedge fund bets improved by 5 in recent months. Our calculations also showed that IBM isn’t among the 30 most popular stocks among hedge funds.

To the average investor there are tons of methods stock market investors put to use to evaluate publicly traded companies. A pair of the less utilized methods are hedge fund and insider trading activity. We have shown that, historically, those who follow the top picks of the best money managers can outperform the broader indices by a very impressive amount (see the details here).

D. E. Shaw

Let’s take a look at the new hedge fund action surrounding International Business Machines Corp. (NYSE:IBM).

What does the smart money think about International Business Machines Corp. (NYSE:IBM)?

At Q4’s end, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in IBM over the last 14 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).


More specifically, AQR Capital Management was the largest shareholder of International Business Machines Corp. (NYSE:IBM), with a stake worth $433.2 million reported as of the end of September. Trailing AQR Capital Management was Arrowstreet Capital, which amassed a stake valued at $359.4 million. D E Shaw, Citadel Investment Group, and Adage Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Now, key money managers were leading the bulls’ herd. Arrowgrass Capital Partners, managed by Nick Niell, initiated the most valuable position in International Business Machines Corp. (NYSE:IBM). Arrowgrass Capital Partners had $24.4 million invested in the company at the end of the quarter. Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital also initiated a $7.9 million position during the quarter. The other funds with new positions in the stock are Israel Englander’s Millennium Management, Deepak Gulati’s Argentiere Capital, and Matthew Hulsizer’s PEAK6 Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to International Business Machines Corp. (NYSE:IBM). We will take a look at Union Pacific Corporation (NYSE:UNP), Paypal Holdings Inc (NASDAQ:PYPL), Royal Bank of Canada (NYSE:RY), and Honeywell International Inc. (NYSE:HON). This group of stocks’ market caps resemble IBM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UNP 55 3329878 2
PYPL 103 4377517 6
RY 14 655003 -3
HON 57 2830615 10
Average 57.25 2798253 3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 57.25 hedge funds with bullish positions and the average amount invested in these stocks was $2798 million. That figure was $1545 million in IBM’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand Royal Bank of Canada (NYSE:RY) is the least popular one with only 14 bullish hedge fund positions. International Business Machines Corp. (NYSE:IBM) is not the least popular stock in this group but hedge fund interest is still below average though we saw a recent uptick in sentiment. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on IBM as the stock returned 24.1% and outperformed the market as well.

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