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

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. Keeping this in mind let’s see whether VMware, Inc. (NYSE:VMW) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

VMware, Inc. (NYSE:VMW) has experienced a decrease in activity from the world’s largest hedge funds of late. 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 at the end of this article for Q3 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. 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. Now let’s take a peek at the latest hedge fund action surrounding VMware, Inc. (NYSE:VMW).

What have hedge funds been doing with VMware, Inc. (NYSE:VMW)?

At Q4’s end, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the previous quarter. By comparison, 32 hedge funds held shares or bullish call options in VMW a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their stakes 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, designating 1.66 percent of its 13F equity portfolio to VMW.

Because VMware, Inc. (NYSE:VMW) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of money managers that slashed their entire stakes heading into Q4. Interestingly, Tor Minesuk’s Mondrian Capital dumped the biggest position of all the hedgies monitored by Insider Monkey, comprising about $6.8 million in stock, and Parsa Kiai’s Steamboat Capital Partners was right behind this move, as the fund dumped about $6.6 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as VMware, Inc. (NYSE:VMW) but similarly valued. These stocks are 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 caps are closest to VMW’s market cap.

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 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 VMW wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); VMW investors were disappointed as the stock returned -17.4% 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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