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Were Hedge Funds Right About Souring On The Charles Schwab Corporation (SCHW)?

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 The Charles Schwab Corporation (NYSE:SCHW) and determine whether the smart money was really smart about this stock.

The Charles Schwab Corporation (NYSE:SCHW) has experienced a decrease in support from the world’s most elite money managers lately. SCHW was in 62 hedge funds’ portfolios at the end of the first quarter of 2020. There were 70 hedge funds in our database with SCHW holdings at the end of the previous quarter. Our calculations also showed that SCHW 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.

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 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. 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.

David Blood

David Blood of Generation Investment Management

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 we’re going to review the recent hedge fund action surrounding The Charles Schwab Corporation (NYSE:SCHW).

How have hedgies been trading The Charles Schwab Corporation (NYSE:SCHW)?

At Q1’s end, a total of 62 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. By comparison, 51 hedge funds held shares or bullish call options in SCHW a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Generation Investment Management was the largest shareholder of The Charles Schwab Corporation (NYSE:SCHW), with a stake worth $1089.1 million reported as of the end of September. Trailing Generation Investment Management was Route One Investment Company, which amassed a stake valued at $489.8 million. Diamond Hill Capital, Citadel Investment Group, and Eminence Capital 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 Yost Capital Management allocated the biggest weight to The Charles Schwab Corporation (NYSE:SCHW), around 16.82% of its 13F portfolio. Route One Investment Company is also relatively very bullish on the stock, earmarking 16.05 percent of its 13F equity portfolio to SCHW.

Since The Charles Schwab Corporation (NYSE:SCHW) has experienced a decline in interest from the smart money, it’s safe to say that there is a sect of fund managers that elected to cut their positions entirely last quarter. It’s worth mentioning that Phill Gross and Robert Atchinson’s Adage Capital Management dumped the largest position of the “upper crust” of funds followed by Insider Monkey, comprising about $68.8 million in stock. Dan Loeb’s fund, Third Point, also dropped its stock, about $47.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 8 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Charles Schwab Corporation (NYSE:SCHW) but similarly valued. These stocks are The Progressive Corporation (NYSE:PGR), Vale SA (NYSE:VALE), The Sherwin-Williams Company (NYSE:SHW), and Applied Materials, Inc. (NASDAQ:AMAT). This group of stocks’ market valuations match SCHW’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PGR 51 1505680 3
VALE 28 1111939 2
SHW 57 1511243 2
AMAT 56 2317608 -16
Average 48 1611618 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 48 hedge funds with bullish positions and the average amount invested in these stocks was $1612 million. That figure was $2907 million in SCHW’s case. The Sherwin-Williams Company (NYSE:SHW) is the most popular stock in this table. On the other hand Vale SA (NYSE:VALE) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks The Charles Schwab Corporation (NYSE:SCHW) 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 SCHW wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SCHW were disappointed as the stock returned 1.9% 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.