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Were Hedge Funds Right About Costco Wholesale Corporation (COST)?

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 (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of December. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Costco Wholesale Corporation (NASDAQ:COST), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is Costco Wholesale Corporation (NASDAQ:COST) worth your attention right now? Prominent investors are betting on the stock. The number of bullish hedge fund bets moved up by 7 in recent months. Our calculations also showed that COST isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video. if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). 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 we’re going to take a peek at the recent hedge fund action encompassing Costco Wholesale Corporation (NASDAQ:COST).

How are hedge funds trading Costco Wholesale Corporation (NASDAQ:COST)?

Heading into the first quarter of 2020, a total of 70 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. On the other hand, there were a total of 48 hedge funds with a bullish position in COST a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Berkshire Hathaway held the most valuable stake in Costco Wholesale Corporation (NASDAQ:COST), which was worth $1273.7 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $893 million worth of shares. Two Sigma Advisors, D E Shaw, and AQR Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Chilton Investment Company allocated the biggest weight to Costco Wholesale Corporation (NASDAQ:COST), around 4.01% of its 13F portfolio. Hosking Partners is also relatively very bullish on the stock, designating 3.42 percent of its 13F equity portfolio to COST.

Consequently, some big names were leading the bulls’ herd. Interval Partners, managed by Gregg Moskowitz, initiated the most valuable position in Costco Wholesale Corporation (NASDAQ:COST). Interval Partners had $17 million invested in the company at the end of the quarter. Larry Chen and Terry Zhang’s Tairen Capital also initiated a $13.9 million position during the quarter. The following funds were also among the new COST investors: Peter Muller’s PDT Partners, Brian Scudieri’s Kehrs Ridge Capital, and Robert Pitts’s Steadfast Capital Management.

Let’s check out hedge fund activity in other stocks similar to Costco Wholesale Corporation (NASDAQ:COST). We will take a look at Raytheon Technologies Corporation (NYSE:UTX), BP plc (NYSE:BP), Paypal Holdings Inc (NASDAQ:PYPL), and Honeywell International Inc. (NYSE:HON). This group of stocks’ market valuations are closest to COST’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
UTX 81 7021856 7
BP 40 1634365 1
PYPL 126 6225698 22
HON 55 2282262 -3
Average 75.5 4291045 6.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 75.5 hedge funds with bullish positions and the average amount invested in these stocks was $4291 million. That figure was $4402 million in COST’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand BP plc (NYSE:BP) is the least popular one with only 40 bullish hedge fund positions. Costco Wholesale Corporation (NASDAQ:COST) is not the least popular stock in this group but hedge fund interest is still below average. 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 lost 1.0% in 2020 through April 20th but still beat the market by 11 percentage points. A small number of hedge funds were also right about betting on COST as the stock returned 6.4% during the same time period and outperformed the market by an even larger margin.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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