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

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. A whopping number of 13F filings filed with U.S. Securities and Exchange Commission has been processed by Insider Monkey so that individual investors can look at the overall hedge fund sentiment towards the stocks included in their watchlists. These freshly-submitted public filings disclose money managers’ equity positions as of the end of the three-month period that ended December 31, so let’s proceed with the discussion of the hedge fund sentiment on International Business Machines Corp. (NYSE:IBM).

International Business Machines Corp. (NYSE:IBM) has experienced an increase in enthusiasm from smart money lately. IBM was in 50 hedge funds’ portfolios at the end of December. There were 45 hedge funds in our database with IBM positions at the end of the previous quarter. Our calculations also showed that IBM 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).

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 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.

TUDOR INVESTMENT CORP

Paul Tudor Jones of Tudor Investment Corp

With all of this in mind let’s analyze the recent hedge fund action regarding International Business Machines Corp. (NYSE:IBM).

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

Heading into the first quarter of 2020, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in IBM over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Cliff Asness’s AQR Capital Management has the largest position in International Business Machines Corp. (NYSE:IBM), worth close to $389.7 million, amounting to 0.4% of its total 13F portfolio. Coming in second is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $302 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism include Renaissance Technologies, and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Beddow Capital Management allocated the biggest weight to International Business Machines Corp. (NYSE:IBM), around 4.7% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, designating 2.41 percent of its 13F equity portfolio to IBM.

Consequently, some big names have been driving this bullishness. HBK Investments, managed by David Costen Haley, established the most outsized position in International Business Machines Corp. (NYSE:IBM). HBK Investments had $11.2 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners also initiated a $7.1 million position during the quarter. The other funds with brand new IBM positions are Paul Tudor Jones’s Tudor Investment Corp, Michael Gelband’s ExodusPoint Capital, and Qing Li’s Sciencast Management.

Let’s now review hedge fund activity in other stocks similar to International Business Machines Corp. (NYSE:IBM). These stocks are NextEra Energy, Inc. (NYSE:NEE), GlaxoSmithKline plc (NYSE:GSK), HDFC Bank Limited (NYSE:HDB), and Linde plc (NYSE:LIN). This group of stocks’ market valuations are similar to IBM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NEE 46 966067 1
GSK 26 2075772 -1
HDB 39 2768292 -2
LIN 47 2791217 1
Average 39.5 2150337 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.5 hedge funds with bullish positions and the average amount invested in these stocks was $2150 million. That figure was $1289 million in IBM’s case. Linde plc (NYSE:LIN) is the most popular stock in this table. On the other hand GlaxoSmithKline plc (NYSE:GSK) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks International Business Machines Corp. (NYSE:IBM) 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 1.3% in 2020 through May 1st but still managed to beat the market by 12.9 percentage points. Hedge funds were also right about betting on IBM, though not to the same extent, as the stock returned -8.1% in 2020 (through May 1st) and outperformed the market as well.
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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