Hedge Funds Aren’t Crazy About Costco Wholesale Corporation (COST) Anymore

Nina Todic

Is Costco Wholesale Corporation (NASDAQ:COST) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also have numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Costco Wholesale Corporation (NASDAQ:COST) shareholders have witnessed a decrease in hedge fund interest of late. Our calculations also showed that COST isn't among the 30 most popular stocks among hedge funds (see the video at the end of this article).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

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Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to view the recent hedge fund action regarding Costco Wholesale Corporation (NASDAQ:COST).

What have hedge funds been doing with Costco Wholesale Corporation (NASDAQ:COST)?

At the end of the second quarter, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in COST over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with COST Positions

The largest stake in Costco Wholesale Corporation (NASDAQ:COST) was held by Berkshire Hathaway, which reported holding $1145.1 million worth of stock at the end of March. It was followed by Fisher Asset Management with a $776.5 million position. Other investors bullish on the company included Two Sigma Advisors, AQR Capital Management, and Citadel Investment Group.

Due to the fact that Costco Wholesale Corporation (NASDAQ:COST) has witnessed a decline in interest from hedge fund managers, it's easy to see that there was a specific group of hedgies who were dropping their full holdings in the second quarter. Intriguingly, Jim Simons's Renaissance Technologies said goodbye to the biggest investment of the "upper crust" of funds watched by Insider Monkey, comprising close to $279.5 million in stock, and Brandon Haley's Holocene Advisors was right behind this move, as the fund cut about $118.8 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds in the second quarter.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Costco Wholesale Corporation (NASDAQ:COST) but similarly valued. We will take a look at Royal Bank of Canada (NYSE:RY), United Technologies Corporation (NYSE:UTX), Amgen, Inc. (NASDAQ:AMGN), and Eli Lilly and Company (NYSE:LLY). This group of stocks' market values resemble COST's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RY,15,383122,-2 UTX,65,6543371,6 AMGN,42,2626039,-4 LLY,43,1872480,-1 Average,41.25,2856253,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.25 hedge funds with bullish positions and the average amount invested in these stocks was $2856 million. That figure was $3254 million in COST's case. United Technologies Corporation (NYSE:UTX) is the most popular stock in this table. On the other hand Royal Bank of Canada (NYSE:RY) is the least popular one with only 15 bullish hedge fund positions. Costco Wholesale Corporation (NASDAQ:COST) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on COST as the stock returned 9.3% during the same time frame and outperformed the market by an even larger margin. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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