Were Hedge Funds Right About Buying Costco Wholesale Corporation (COST)?

Reymerlyn Martin

Tue, Mar 26, 2019, 8:28 PM

During the fourth quarter the Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by nearly 7 percentage points as investors worried over the possible ramifications of rising interest rates. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only 298 S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Costco Wholesale Corporation (NASDAQ:COST) and see how the stock is affected by the recent hedge fund activity.

Is Costco Wholesale Corporation (NASDAQ:COST) an excellent stock to buy now? Money managers are betting on the stock. The number of bullish hedge fund bets moved up by 9 in recent months. Our calculations also showed that COST isn't among the 30 most popular stocks among hedge funds. COST was in 48 hedge funds' portfolios at the end of December. There were 39 hedge funds in our database with COST holdings at the end of the previous quarter.

To most investors, hedge funds are perceived as unimportant, outdated investment tools of years past. While there are greater than 8000 funds with their doors open at the moment, Our researchers choose to focus on the masters of this group, approximately 750 funds. These investment experts manage most of the smart money's total asset base, and by keeping track of their top investments, Insider Monkey has revealed numerous investment strategies that have historically outstripped the S&P 500 index. Insider Monkey's flagship hedge fund strategy exceeded the S&P 500 index by nearly 5 percentage points annually since its inception in May 2014 through early November 2018. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 27.5% since February 2017 (through March 12th) even though the market was up nearly 25% during the same period. We just shared a list of 6 short targets in our latest quarterly update and they are already down an average of 6% in less than a month.

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Let's check out the fresh hedge fund action surrounding Costco Wholesale Corporation (NASDAQ:COST).

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

Heading into the first quarter of 2019, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of 23% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards COST over the last 14 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Berkshire Hathaway was the largest shareholder of Costco Wholesale Corporation (NASDAQ:COST), with a stake worth $882.7 million reported as of the end of September. Trailing Berkshire Hathaway was AQR Capital Management, which amassed a stake valued at $634.9 million. Fisher Asset Management, Arrowstreet Capital, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

As one would reasonably expect, specific money managers have jumped into Costco Wholesale Corporation (NASDAQ:COST) headfirst. Waratah Capital Advisors, managed by Brad Dunkley and Blair Levinsky, assembled the largest position in Costco Wholesale Corporation (NASDAQ:COST). Waratah Capital Advisors had $36.2 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe's Voleon Capital also initiated a $28.5 million position during the quarter. The other funds with brand new COST positions are Clint Carlson's Carlson Capital, and Nick Niell's Arrowgrass Capital Partners.

Let's also examine 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 Itau Unibanco Holding SA (NYSE:ITUB), Twenty-First Century Fox Inc (NASDAQ:FOX), Linde plc (NYSE:LIN), and Diageo plc (NYSE:DEO). This group of stocks' market valuations resemble COST's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ITUB,18,1032674,3 FOX,44,5266521,-5 LIN,37,1618098,37 DEO,14,891175,-1 Average,28.25,2202117,8.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $2202 million. That figure was $3255 million in COST's case. Twenty-First Century Fox Inc (NASDAQ:FOX) is the most popular stock in this table. On the other hand Diageo plc (NYSE:DEO) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Costco Wholesale Corporation (NASDAQ:COST) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on Costco as the stock returned 15% and outperformed the market as well.

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

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