Were Hedge Funds Right About Shunning Canadian Pacific Railway Limited (CP)?

OTTAWA: We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Canadian Pacific Railway Limited (NYSE:CP) and determine whether hedge funds skillfully traded this stock.

Canadian Pacific Railway Limited has seen an increase in activity from the world’s largest hedge funds in recent months. CP was in 32 hedge funds’ portfolios at the end of March. There were 29 hedge funds in our database with CP positions at the end of the previous quarter. Our calculations also showed that CP isn’t among the 30 most popular stocks among hedge funds.

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 out-performance 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 S&P 500 ETFs by 58 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 under-performed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of under-performance 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a gander at the key hedge fund action surrounding Canadian Pacific Railway Limited.

What have hedge funds been doing with Canadian Pacific Railway Limited (NYSE:CP)?

At the end of the first quarter, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the fourth quarter of 2019. On the other hand, there were a total of 30 hedge funds with a bullish position in CP a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

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