International Business Machines Corp. (IBM) doesn’t seem like a stock that hedge funds would flock too. This is a company that has fallen by 20% over the past 5-years versus an S&P 500 that has risen by over 72%.

What is surprising is that smart money hedge funds where holding IBM during the second quarter of 2018. IBM remained on the WhaleWisdom Heatmap but fell to number 99 from 58. Since the second quarter ended the shares of IBM have risen by over 8% even beating the S&P 500’s gain of 7%.

Holding Shares

Of the 150 hedge funds tracked for the heat map, 21 held a position in the stock. Meanwhile, 6 increased their positions while 12 decreased their positions. Overall hedge funds were dumping the stock with the number of total 13F shares filed falling by 6.3%. Meanwhile, the number of total institutional shares fell by over 2%.

(WhaleWisdom)

Where Is the Growth

One must wonder what it is this group of funds see in IBM. Analysts forecast IBM to deliver no earnings growth this year while estimating revenue to rise by just over 1%. What may be even more horrifying is that consensus estimates for 2019 are just as bad with earnings forecast to rise by 1.6% followed by 3% growth in 2020. Analysts forecast revenue growth to be non-existent through the year 2020 with a compounded annual growth rate of 0.5%.

The current earnings and revenue estimates are lower than at the start of the year. For example, analysts have lowered their 2020 earnings estimates by more than 2% since the middle of January.

No Upside

Analysts see shares rising to an average price target of $162.75 which is just 7% higher than the current stock price of around $151.20. That price target has fallen by over 4% since the start of the year.

The stock isn’t even that cheap when considering it projected earnings growth rate with the shares trading at a 2019 PE ratio of 10.8.  That is over three times the earnings growth rate giving the stock a PEG ratio of over 3.3.

Perhaps the smart money was making a short-term trade. There could be something other investors and analysts have yet to see.

Regardless shares of IBM have risen since the end of the second-quarters so one should give the funds credit when credit is due.

Lowes Companies Inc.’s (LOW) stock has been on fire increasing by over 40% since early May; outperforming Home Depot Inc. (HD) and the S&P 500 during that time. The top 150 hedge funds WhaleWisdom tracks for its heat map where adding the home improvement retailer to their portfolios during the second quarter.  The buying was convincing enough for WhaleWisdom to include the stock in the WhaleWisdom WhaleIndex 100.

The stock delivered strong fiscal second-quarter results, as well as a plan to reduce cost. As a result, the stock has soared, playing a game of catch-up with Home Depot.

Moving Up

The stock moved up on the WhaleWisdom heat map to 36 from its earlier position of 43 in the first quarter. The top hedge funds tracked for the heat map were buying the shares in the quarter, with 21 now holding the stock. 13 funds increased their positions while eight lowered their holdings.

Not All Hedge Funds Are Smart

(WhaleWisdom)

However, more interesting is that overall, hedge funds were selling their shares during the quarter. The amount of total 13F shares declined by 1% to 64 million. Meanwhile, institutions were dumping their shares too, with the number of total 13F shares falling by 3% to 593 million.

Shifting the Business

The shares have risen since the middle of August. That was when the company laid out an initiative to better streamline the business with a focus on its core operations, under new CEO Marvin Ellison.

The company reduced its full-year earnings and revenue guidance to $4.55 at the mid-point, lower than prior guidance of $5.45 at the mid-point. However, the lowered guidance was a result of the company’s decision to close its 99 Orchard Supply Hardware stores.

Multiple Expansion

Since the company announced its current plans, investors have been willing to pay a premium for the stock. The one-year forward PE ratio for Lowes has expanded to 19.5 from 16.3 in the middle of August. The multiple expansion has allowed Lowes stock to trade at a PE ratio closer to that of Home Depots’ 20.2.

If Lowes’ turnaround can deliver strong results and lower its operating cost; the company should be able to drive margins higher. Then the difference between the PE of Home Depot and that of Lowes should narrow further.

Not every hedge fund is the same, and Lowes stock performance is an example. It’s another reason the best and brightest funds get that title; it is because they are.

Intel Corp’s. (INTC) stock has been hammered since the beginning of June, falling by more than 20 percent from its highs. It shouldn’t come as a surprise that hedge funds and institutions were dumping the stock during the second quarter.

The stock’s decline started when it was announced the company’s CEO was resigning due to an improper relationship with an employee. Three months later, the company is still searching for a replacement, and it has weighed on shares of the chip maker.

Ranking Falls

Of the 100 companies the WhaleWisdom heatmap tracks, Intel fell to number 96 in the second quarter, down from number 41 in the first quarter. Institutions and hedge funds were dumping the stock, pushing the stock lower.

(WhaleWisdom)

Hedge Fund’s Dump Shares

During the quarter the number of shares held by hedge funds dropped by more than 4 percent to 158 million total 13F shares. The number of shares held by institutions fell as well, by 2 percent to 3.1 billion. In total 93 hedge funds and 864 institutions, added to or created new positions in the stock. Meanwhile, 103 hedge funds and 1,153 institutions closed or reduce their holdings.

Strong Results

The steep sell-off comes as a surprise in some regards. The company delivered strong second-quarter results, with earnings topping estimates by 7 percent, while revenue beat estimates by 1 percent. Additionally, analysts have increased their forecasts for the third quarter and the balance of the year.

Bullish Outlook

Over the past three months, analysts have raised their third-quarter earnings estimates by more than 10 percent to $1.15 per share. Meanwhile, revenue estimates have increased by more than 4 percent to $18.1 billion. Earnings for the quarter are now estimated to grow by more than 13 percent versus last year, while revenue is forecast to increase by 12 percent.

The outlook for the full-year is even stronger. Earnings are forecast to grow by more than 20 percent, up from previous estimates for growth of only 11 percent in the middle of May. Meanwhile, revenue is now expected to grow almost 11 percent, better than earlier forecasts for an increase of only 8 percent.

The robust business outlook was hurt when the company said in July it would delay the release of its 10-nanometer chip until late 2019. The chip was supposed to be ready by the end of 2018.

Although the business outlook for the stock looks strong, there is no doubt some institutions fear a delay in the 10nm chip may cause Intel’s business to slip in coming years.

General Electric Co.’s (GE) stocks fall from grace has been legendary. Shares have plunged by almost 50 percent over the past year. But, even worse, the stock was removed from the Dow Jones Industrial Average. It was a position the company had held since the year 1907. So, when famous investors start to buy a battered stock like GE, one should take notice.

The stock moved into the seventh position on the WhaleWisdom heat map, up from its previous rank of 94. A big reason for the stock’s rise in the ranking was due to Viking Global Investors buying a massive $930 million stake in the company. Viking Global is one of the first Tiger Cub hedge funds. A group of investors that trace their origins to famed investor Julian Robertson of Tiger Management.

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Building A Position

Viking’s started and grew its stake in GE to more than 68 million shares. It makes the stock a top 5 holding representing almost 5.3 percent of the hedge funds total portfolio.

(WhaleWisdom)

Hedge Funds Buying

During the quarter other hedge funds were buying shares of GE and increasing their stakes. The total number of 13F shares held by hedge funds increased by more than 10 percent to 478 million shares. A total of 70 funds added to or started new positions in the stock. Meanwhile, 98 funds closed or reduced their stakes.

Momentum Shifting

It could be a big bet that the worst is behind GE and that the business outlook only gets better from here. Analysts have already slashed their estimates on the stock. Earnings for 2018 have dropped to $0.94 from the previous forecast of $0.98 at the start of the year. Meanwhile, 2019 earnings have fallen to $1.03 from earlier estimates of $1.08. But, the surprise comes in the year 2020. That is because analysts have increased their forecast to $1.12 from $1.10.

Pessimistic Views

The one-year forward price-to-earnings ratio has fallen to its cheapest level since 2015, at 12. Hedge Funds are likely seeing the stock as offering an attractive risk/reward opportunity. Meanwhile, the stock’s low earnings multiple sends a message of investors overall pessimistic views.

If analysts are beginning to increase their forecast for the year 2020, it could be a sign that momentum will start to turn more favorable for the stock. It could be a critical reason why hedge funds are beginning to accumulate shares of GE at a time when other investors continue dumping the stock.

VMware Inc.’s (VMW) stock has climbed by more than 22 percent in 2018, and hedge funds were adding the stock to their portfolios at a furious pace in the second quarter.  During the quarter, the stock rose to number 31 of the top 100 stocks on the WhaleWisdom Heat Map. Additionally, it was added to the WhaleWisdom WhaleIndex 100 on August 15.

The company finds itself in an enviable position in the battle for dominance in cloud computing through its partnership with Amazon Web Services. Meanwhile, analysts are forecasting strong earnings and revenue growth through the year 2020. However, shares may already be fully valued.

(Whale Wisdom)

Hedge Funds Buying At A Furious Pace

Of the 150 hedge funds WhaleWisdom tracks for its heat map, 16 hedge funds held the stock, with four hedge funds making the stock a top-ten holding.  However, it doesn’t stop there, even the hedge funds outside of the top 150 funds tracked for the heat map were buying the stock. The total 13F shares held by hedge funds increased by more than 31 percent in the second quarter to 22.3 million. In total 45 hedge funds created a new position or added to existing ones. That is versus the 38 that were reducing or exiting their stakes.

Strong Growth

Analysts are bullish on VMware too, currently forecasting earnings to grow by 18.5 percent to $6.15 per share, on revenue growth of more than 11 percent to $8.8 billion in fiscal 2019. Earnings are expected to continue to grow in 2020 and 2021 as well but at a slower pace of 8 and 9 percent. Revenue growth is expected to continue to rise as well, at 8 and 7 percent.

Fully Valued

However, the robust growth comes at a price, with investors paying nearly three times the 2020 earnings growth rate. The stock trades at roughly 23 times 2020 earnings estimates of $6.62 per share, while also trading at the upper end of its historical valuation range of 15 to 27, since 2016.

Analysts do not see shares rising much from their current stock price. The average price target on the stock is just $164, about 7 percent higher than the current stock price of $153.25.

Hedge fund investors may be betting revenue and growth accelerates at an even faster pace than the current forecasts. If that growth doesn’t emerge, it could result in the fast-moving hedge funds quickly running from the stock, sending it sharply lower.