General Electric Co. (GE) stock’s fall from grace has been historic.  Since December 2016, the stock has declined by about 70%, resulting in a market capitalization loss of about $200 billion. But interestingly, some of the smartest hedge funds were actively buying the stock during the second quarter.

The stock made it to the WhaleWisdom Heat Map during the second quarter, landing at 12 from a previously unranked position. The heat map assesses the activity of the top 150 hedge funds as determined by the WhaleWisdom WhaleScore calculation.

Rising on the Heat Map

Of the 150 hedge funds included in the heat map ranking, 17 funds own the stock. Nine funds increased their holdings during the second quarter, meanwhile, six of the funds reduced their positions.

(WhaleWisdom)

Hedge Funds Piling In

Overall, the total number of hedge funds holding the stock rose in the second quarter. The aggregate amount of 13F shares held among hedge funds increased by 13.5% to 568.7 million shares in the second quarter. In total 19 funds created new positions, while 48 added to their holdings, as 14 funds closed out their positions and 49 reduced them.

A Return to Growth?

One reason we may see some hedge funds moving into GE is the anticipation for improving earnings. Currently analysts forecast earnings will climb by 18% in 2020 to $0.72 per share, followed by earnings growth of 27.5% in 2021 to $0.91 per share.

Based on those earnings estimates, the stock trades at roughly 12.4 times 2020 earnings estimates. That earnings multiple is lower than the S&P 500, which trades for roughly 16.5 times 2020 earnings, and it is lower than many of its peers. For example, Honeywell International Inc. (HON)  trades at a one-year forward earnings multiple of 18.6, while United Technologies Inc. (UTX) trades at 15.6.

Despite the appearance of an improving business, future revenue growth is expected to underwhelm. Revenue is forecast to fall by 4% in 2019 to $116.7 billion. That is followed by analysts’ forecast for revenue to fall again in 2020 by 6.7% to $108.9 billion, then increasing by 6% in 2021 to $115.4 billion.

Overall, GE stock has appeared to stabilize in recent months in the $7 to $9 range, and perhaps some investors felt that the stock may be worth the gamble especially if the business begins to improve and earnings growth returns.

Etsy Inc. (ETSY) has risen by just over 19.3% in 2019, slightly ahead of the S&P 500’s gain of 17.8%. But the stock fell sharply in the second quarter, after reporting better than expected earnings on weaker than forecast revenue. It appears that the pullback in the equity was used as an opportunity by hedge funds to pick up the stock.

The was stock was also added to the WhaleWisdom WhaleIndex 100 on August 15, following the hedge fund activity in the second quarter. But more recently, the analyst community has become very positive on the stock.

Hedge Funds Buy

During the second quarter, the total number of 13F shares increased by almost 12% to about 26.1 million shares. Overall, 21 funds created a new position in the stock, while 17 increased their positions. Meanwhile, nine funds closed their holdings as 20 reduced them. However, despite the optimism among hedge funds, the total number of 13F held by all institutions fell by over 3% to 111.26 million.

(Whale Wisdom)

Analysts Lift Targets

The stock’s struggles have continued in the weeks following the conclusion of the second quarter, with shares falling by roughly 8% through September 30. The lower price has resulted in the analyst community growing more bullish on the equity.

The average analysts’ price target on the stock has increased to $76.20, which is roughly 34.3% higher than the stock’s current price of $56.75 on October 4. The current price is about 2.7% higher than average price target of $74.23 on July 1. Also, the number of analysts rating the stock a buy or outperform has increased to 14 from 9 over that time. Additionally, the number of analysts rating the stock as a hold as dropped to 2 from 6. There are currently no analysts that rate the shares an underperform or sell, which remains unchanged.

Reasons to be Optimistic

One reason why investors and analysts may be getting more bullish is that the company has recently launched free shipping on purchases of more than $35 from the same merchant.  Additionally, the company agreed to purchase Reverb Holdings for $275 million in July. Reverb is an online marketplace for new, used and vintage musical gear.

Etsy’s shares have bounced back some since the beginning of September. When updated holdings start coming out in November, it should reveal if hedge fund investors were still buying the stock during the third quarter pullback, or if they were selling as the analyst community became more bullish.

The S&P 500 has had a very strong run in 2019, with the index rising by around 18.2%. However, this year’s gains are misleading, due to the sharp end of year sell-off of 2018. Over the past 52-weeks, the S&P 500 has increased by a lackluster 1.9%, but perhaps that is all about to change for the better.

Interestingly, the SPDR S&P 500 ETF (SPY), a proxy for the S&P 500, has seen a lot of interest among some of the smartest hedge funds. In fact, for the second quarter of 2019, the ETF was ranked number one on the WhaleWisdom Heat Map. The heat map ranking assesses the activity of the top 150 hedge funds as determined by the WhaleWisdom WhaleScore calculation.

Buying The Index

The ETF saw a big rise in its ranking this quarter after sitting at number 74 in the first quarter. At the end of the second quarter, 15 of the top 150 funds held the ETF in their portfolio, with 3 holding the position among their top 10. In total, five funds increased their holdings while 8 reduced them.

A Divergent View

The bullish view of the ETF comes in stark contrast to what the rest of the hedge fund industry was doing during the quarter. Overall, hedge funds were reducing their holdings of the S&P 500 ETF, with the total number of 13F shares held falling by 15.7% to 36.4 million shares.

Headline Risk

Certainly there may be a good reason for this divergence, as volatility in the broader stock market continues to gyrate on trade headlines between the US and China. May and June saw a tremendous amount of volatility in the market as trade tensions between the two countries rose sharply, and as a new round of tariffs were placed on imports from China.

Recession Fears

Additionally, over recent months recession concerns have risen sharply among some investors, resulting in yields on Treasury rates plunging. However, while concerns among the broader sector were taken as a negative signal and a bearish indicator, perhaps the better performing funds saw this as an opportunity to take advantage of the stock market’s weakness and accumulate assets.

While rising geopolitical risk and fears of a recession have created a stagnate stock market, perhaps the best signal to take away from the divergent views among the hedge fund industry is that an opportunity for investors with a long enough time horizon has been created.

Comcast Corp. (CMCSA) shares have risen by almost 36% in 2019, easily beating the S&P 500’s gain of about 19.5%. The company’s big advance has followed better than expected quarterly results, and comes ahead of the company’s big push into its direct to the consumer streaming offering.

The equity has been popular among many of the top hedge fund investors. The stock ranked at 15 on the WhaleWisdom Heat Map at the end of the second quarter, which was down from a ranking of 2. Still, it is a very strong ranking and it means that the stock was very popular among the top 150 hedge funds as determined by the WhaleWisdom WhaleScore calculation.

Top Funds Increasing their Holdings

Of the top 150 hedge funds that are part of the heat map, 27 of them held the stock in their portfolio. Out of those holders, 7 of them held the stock among their top 10 positions. Also, 13 hedge funds increased their holdings, while 10 decreased their positions.

Others Funds Seem Unsure

The rest of the hedge fund industry was not nearly as bullish on Comcast as the top 150 funds used in the heat map. Overall, the total 13F shares held among funds increased fractionally to 287.76 million from 285.99 million. Overall, 29 funds created new positions and 9 funds which closed them out. Also, 50 funds increased their holdings, while 79 reduced them.

Analysts Forecast Strong Growth

Analysts are looking for the company to deliver strong earnings growth over the next two years with earnings rising by 44.3% to $3.68 per share in 2021, from $2.55 per share in 2018. It gives the stock a compounded annual growth rate (CAGR) of 13%.  It leaves the stock trading with a one-year forward PE ratio of 13.6, and a PEG ratio when adjusted for the CAGR of 1.05, making the stock very compelling.

It is yet to be seen how much topline revenue growth Comcast will generate from its direct to the consumer streaming offering. Current analysts’ consensus estimates are calling for revenue to grow 24.7% through 2021 to $117.8 billion, from $94.5 billion in 2018.

The strong stock performance coupled with the move of some of the top funds into Comcast, would suggest that some investors are betting that the stock may only continue to rise. Layer on a stock that appears to be trading at a very reasonable valuation, and its no wonder why the stock ranked among the top in the second quarter.

Shares of TJX Companies, Inc. (TJX) have had a solid run in 2019, rising by almost 27% compared to an S&P 500 that has jumped by 20%. The strong stock performance comes despite significant headwind for the company, including the US-China trade war and tariffs that have been placed on imports in from China. Still, hedge fund investors are moving into the stock, placing the company on the WhaleWisdom Heat Map.

The stock ranked ninth on the heat map, which was up from 48 previously. The heatmap looks at the activity of the top 150 hedge funds based on the Whalescore calculation. The significant increase in the heat map rank came at a time when overall institutions and hedge funds were reducing their holdings of the stock.

Heat Map Ranking

During the quarter, there were 16 hedge funds out of the top 150 that held TJX in their portfolio. Out of those 16, two of them held the stock among their top 10-holdings. Additionally, there were 6 funds that were adding to their positions, while there were 8 decreasing their positions.

Institutions Reducing Holdings

Overall, hedge funds were reducing the number of shares that they held. During the second quarter, the number of 13F shares held fell by 9.7% to 66.8 million from 74 million. Additionally, the total number of shares held among institutions fell slightly to 1.07 billion from 1.08 billion.

Fundamental Questions

More broadly there has been a great deal of concern among investors as to how tariffs and the trade war may impact many retailers. To this point, those worries have proven warranted. TJX reported revenue for the fiscal second quarter of 2020 that was $9.78 billion, lower than estimates for $9.9 billion. Additionally, the company lowered its third quarter earnings guidance to $0.64 at the mid-point, versus estimates for $0.68. Further, revenue estimates for the next quarter came down at the mid-point to $10.25 billion from $10.37 billion.

Full year guidance for the company has fallen as well. Now it sees full year 2020 earnings in a range of $2.56 to $2.61, versus consensus estimates of $2.62 per share. Also, the full-year revenue estimates fell to a range of $40.9 billion to $41.2 billion,  versus estimates for $41.33 billion.

It is entirely possible that many of the top funds buying the stock during the second quarter abandoned it following weak results and guidance. However, based on the performance of the stock since the end of August, the rising price would indicate otherwise.

It isn’t the first time we have seen a stock rise sharply on the heatmap, only to be followed by the rest of the investing crowd at a later date; it likely won’t be the last either.