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Were Hedge Funds Right About Souring On VMware, Inc. (VMW)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. After several tireless days we have finished crunching the numbers from nearly 835 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms’ equity portfolios as of December 31st. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards VMware, Inc. (NYSE:VMW).

VMware, Inc. (NYSE:VMW) was in 33 hedge funds’ portfolios at the end of December. VMW has experienced a decrease in hedge fund sentiment recently. There were 37 hedge funds in our database with VMW holdings at the end of the previous quarter. Our calculations also showed that VMW isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

To most investors, hedge funds are viewed as underperforming, outdated financial vehicles of yesteryear. While there are more than 8000 funds with their doors open at present, Our researchers choose to focus on the leaders of this club, approximately 850 funds. It is estimated that this group of investors manage bulk of all hedge funds’ total capital, and by following their finest stock picks, Insider Monkey has brought to light a number of investment strategies that have historically outperformed the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

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 we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. With all of this in mind let’s take a gander at the key hedge fund action regarding VMware, Inc. (NYSE:VMW).

Hedge fund activity in VMware, Inc. (NYSE:VMW)

Heading into the first quarter of 2020, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in VMW over the last 18 quarters. With hedgies’ sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in VMware, Inc. (NYSE:VMW), which was worth $311.3 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $107.7 million worth of shares. Citadel Investment Group, Two Sigma Advisors, and Holocene Advisors 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 Lunia Capital allocated the biggest weight to VMware, Inc. (NYSE:VMW), around 2.92% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, setting aside 1.66 percent of its 13F equity portfolio to VMW.

Judging by the fact that VMware, Inc. (NYSE:VMW) has experienced declining sentiment from the smart money, it’s safe to say that there was a specific group of fund managers who sold off their full holdings by the end of the third quarter. At the top of the heap, Tor Minesuk’s Mondrian Capital sold off the biggest stake of the 750 funds followed by Insider Monkey, worth an estimated $6.8 million in stock. Parsa Kiai’s fund, Steamboat Capital Partners, also dropped its stock, about $6.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 4 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks similar to VMware, Inc. (NYSE:VMW). We will take a look at Takeda Pharmaceutical Company Limited (NYSE:TAK), Enterprise Products Partners L.P. (NYSE:EPD), Raytheon Company (NYSE:RTN), and The Charles Schwab Corporation (NYSE:SCHW). This group of stocks’ market values are similar to VMW’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TAK 28 1186486 -3
EPD 28 340248 4
RTN 53 3458796 -1
SCHW 70 4021282 11
Average 44.75 2251703 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 44.75 hedge funds with bullish positions and the average amount invested in these stocks was $2252 million. That figure was $777 million in VMW’s case. The Charles Schwab Corporation (NYSE:SCHW) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE:TAK) is the least popular one with only 28 bullish hedge fund positions. VMware, Inc. (NYSE:VMW) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately VMW wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); VMW investors were disappointed as the stock returned -30.2% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.

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

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