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

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Costco Wholesale Corporation (NASDAQ:COST) and determine whether the smart money was really smart about this stock.

Costco Wholesale Corporation (NASDAQ:COST) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. COST was in 68 hedge funds’ portfolios at the end of March. There were 70 hedge funds in our database with COST positions at the end of the previous quarter. Our calculations also showed that COST isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 58 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a glance at the fresh hedge fund action surrounding Costco Wholesale Corporation (NASDAQ:COST).

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

At the end of the first quarter, a total of 68 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the previous quarter. By comparison, 44 hedge funds held shares or bullish call options in COST a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Warren Buffett’s Berkshire Hathaway has the most valuable position in Costco Wholesale Corporation (NASDAQ:COST), worth close to $1.2356 billion, comprising 0.7% of its total 13F portfolio. On Berkshire Hathaway’s heels is Fisher Asset Management, led by Ken Fisher, holding a $877.1 million position; the fund has 1.1% of its 13F portfolio invested in the stock. Some other peers that hold long positions comprise D. E. Shaw’s D E Shaw, Renaissance Technologies and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Hosking Partners allocated the biggest weight to Costco Wholesale Corporation (NASDAQ:COST), around 4.63% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, designating 4.54 percent of its 13F equity portfolio to COST.

Judging by the fact that Costco Wholesale Corporation (NASDAQ:COST) has witnessed falling interest from the entirety of the hedge funds we track, it’s easy to see that there is a sect of funds that elected to cut their full holdings heading into Q4. Interestingly, Gregg Moskowitz’s Interval Partners dropped the largest investment of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $17 million in stock. Parvinder Thiara’s fund, Athanor Capital, also dropped its stock, about $15.9 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 2 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Costco Wholesale Corporation (NASDAQ:COST) but similarly valued. These stocks are McDonald’s Corporation (NYSE:MCD), Medtronic plc (NYSE:MDT), Amgen, Inc. (NASDAQ:AMGN), and NextEra Energy, Inc. (NYSE:NEE). This group of stocks’ market values resemble COST’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MCD 66 953580 9
MDT 59 1839749 -7
AMGN 52 2056537 -6
NEE 52 1436389 6
Average 57.25 1571564 0.5

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 $1572 million. That figure was $4352 million in COST’s case. McDonald’s Corporation (NYSE:MCD) is the most popular stock in this table. On the other hand Amgen, Inc. (NASDAQ:AMGN) is the least popular one with only 52 bullish hedge fund positions. Compared to these stocks Costco Wholesale Corporation (NASDAQ:COST) is more popular among hedge funds. 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 gained 13.3% in 2020 through June 25th and still beat the market by 16.8 percentage points. Unfortunately COST wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on COST were disappointed as the stock returned 5.6% during the second quarter (through June 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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