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Were Hedge Funds Right About The Sherwin-Williams Company (SHW) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, 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 you are going to find out whether hedge funds thoughtThe Sherwin-Williams Company (NYSE:SHW) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is The Sherwin-Williams Company (NYSE:SHW) a healthy stock for your portfolio? Investors who are in the know were buying. The number of bullish hedge fund bets rose by 2 lately. Our calculations also showed that SHW 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). SHW was in 57 hedge funds’ portfolios at the end of March. There were 55 hedge funds in our database with SHW holdings at the end of the previous quarter.

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.

CHILTON INVESTMENT COMPANY

Richard Chilton of Chilton Investment Company

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. Keeping this in mind let’s go over the fresh hedge fund action surrounding The Sherwin-Williams Company (NYSE:SHW).

How are hedge funds trading The Sherwin-Williams Company (NYSE:SHW)?

Heading into the second quarter of 2020, a total of 57 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from one quarter earlier. By comparison, 42 hedge funds held shares or bullish call options in SHW a year ago. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Farallon Capital has the largest position in The Sherwin-Williams Company (NYSE:SHW), worth close to $234 million, accounting for 2% of its total 13F portfolio. Coming in second is Chilton Investment Company, managed by Richard Chilton, which holds a $195.3 million position; 7.4% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions comprise Phill Gross and Robert Atchinson’s Adage Capital Management, Ric Dillon’s Diamond Hill Capital and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Chilton Investment Company allocated the biggest weight to The Sherwin-Williams Company (NYSE:SHW), around 7.4% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, earmarking 5.26 percent of its 13F equity portfolio to SHW.

Now, key money managers have been driving this bullishness. Third Point, managed by Dan Loeb, assembled the biggest position in The Sherwin-Williams Company (NYSE:SHW). Third Point had $68.9 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also initiated a $42.1 million position during the quarter. The other funds with new positions in the stock are Brandon Haley’s Holocene Advisors, Robert Joseph Caruso’s Select Equity Group, and Jack Woodruff’s Candlestick Capital Management.

Let’s also examine hedge fund activity in other stocks similar to The Sherwin-Williams Company (NYSE:SHW). We will take a look at Applied Materials, Inc. (NASDAQ:AMAT), Pinduoduo Inc. (NASDAQ:PDD), TC Energy Corporation (NYSE:TRP), and Humana Inc (NYSE:HUM). This group of stocks’ market values resemble SHW’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMAT 56 2317608 -16
PDD 28 1671925 -4
TRP 24 182598 2
HUM 70 4246626 -5
Average 44.5 2104689 -5.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 44.5 hedge funds with bullish positions and the average amount invested in these stocks was $2105 million. That figure was $1511 million in SHW’s case. Humana Inc (NYSE:HUM) is the most popular stock in this table. On the other hand TC Energy Corporation (NYSE:TRP) is the least popular one with only 24 bullish hedge fund positions. The Sherwin-Williams Company (NYSE:SHW) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on SHW as the stock returned 26% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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