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Were Hedge Funds Right About The Dow Chemical Company (DOW)?

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. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Dow Inc. (NYSE:DOW).

Dow Inc. (NYSE:DOW) shareholders have witnessed a decrease in enthusiasm from smart money recently. Our calculations also showed that DOW 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).

David Harding

David Harding of Winton Capital Management

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 go over the new hedge fund action encompassing Dow Inc. (NYSE:DOW).

What does smart money think about Dow Inc. (NYSE:DOW)?

Heading into the first quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the third quarter of 2019. On the other hand, there were a total of 0 hedge funds with a bullish position in DOW a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is DOW A Good Stock To Buy?

The largest stake in Dow Inc. (NYSE:DOW) was held by Masters Capital Management, which reported holding $105.6 million worth of stock at the end of September. It was followed by Winton Capital Management with a $30.3 million position. Other investors bullish on the company included Omega Advisors, Citadel Investment Group, and AQR Capital Management. In terms of the portfolio weights assigned to each position Masters Capital Management allocated the biggest weight to Dow Inc. (NYSE:DOW), around 6% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, earmarking 2.68 percent of its 13F equity portfolio to DOW.

Since Dow Inc. (NYSE:DOW) has experienced falling interest from the smart money, logic holds that there is a sect of hedgies who were dropping their full holdings by the end of the third quarter. Intriguingly, Clint Carlson’s Carlson Capital said goodbye to the biggest position of the “upper crust” of funds tracked by Insider Monkey, totaling close to $36.8 million in stock, and Lee Ainslie’s Maverick Capital was right behind this move, as the fund said goodbye to about $34.8 million worth. These transactions are important to note, as total hedge fund interest was cut by 3 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Dow Inc. (NYSE:DOW) but similarly valued. We will take a look at Autodesk, Inc. (NASDAQ:ADSK), V.F. Corporation (NYSE:VFC), Dollar General Corp. (NYSE:DG), and Manulife Financial Corporation (NYSE:MFC). This group of stocks’ market caps are similar to DOW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ADSK 64 3357850 16
VFC 29 770788 -7
DG 50 2075641 1
MFC 19 284486 0
Average 40.5 1622191 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.5 hedge funds with bullish positions and the average amount invested in these stocks was $1622 million. That figure was $165 million in DOW’s case. Autodesk, Inc. (NASDAQ:ADSK) is the most popular stock in this table. On the other hand Manulife Financial Corporation (NYSE:MFC) is the least popular one with only 19 bullish hedge fund positions. Dow Inc. (NYSE:DOW) 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 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately DOW wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); DOW investors were disappointed as the stock returned -37% 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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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