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2019 Review: Top Hedge Fund Stocks vs. Cummins Inc. (CMI)

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year’s Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Cummins Inc. (NYSE:CMI) changed recently.

Is Cummins Inc. (NYSE:CMI) an excellent stock to buy now? The best stock pickers are becoming less hopeful. The number of bullish hedge fund bets shrunk by 14 recently. Our calculations also showed that CMI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Today there are tons of gauges investors employ to assess publicly traded companies. A pair of the less utilized gauges are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can beat their index-focused peers by a healthy amount (see the details here).

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to take a glance at the new hedge fund action encompassing Cummins Inc. (NYSE:CMI).

What does smart money think about Cummins Inc. (NYSE:CMI)?

At Q3’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from one quarter earlier. By comparison, 32 hedge funds held shares or bullish call options in CMI a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CMI A Good Stock To Buy?

The largest stake in Cummins Inc. (NYSE:CMI) was held by AQR Capital Management, which reported holding $404.8 million worth of stock at the end of September. It was followed by Holocene Advisors with a $186.7 million position. Other investors bullish on the company included Citadel Investment Group, Two Sigma Advisors, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Holocene Advisors allocated the biggest weight to Cummins Inc. (NYSE:CMI), around 1.92% of its 13F portfolio. Centenus Global Management is also relatively very bullish on the stock, dishing out 0.69 percent of its 13F equity portfolio to CMI.

Because Cummins Inc. (NYSE:CMI) has experienced falling interest from the smart money, we can see that there were a few money managers that elected to cut their full holdings last quarter. Intriguingly, Renaissance Technologies said goodbye to the biggest investment of the “upper crust” of funds followed by Insider Monkey, totaling close to $20.4 million in stock. Anand Parekh’s fund, Alyeska Investment Group, also said goodbye to its stock, about $20.2 million worth. These transactions are important to note, as total hedge fund interest was cut by 14 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Cummins Inc. (NYSE:CMI) but similarly valued. We will take a look at Coca-Cola European Partners plc (NYSE:CCEP), TD Ameritrade Holding Corp. (NYSE:AMTD), Fiat Chrysler Automobiles NV (NYSE:FCAU), and KLA-Tencor Corporation (NASDAQ:KLAC). All of these stocks’ market caps resemble CMI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CCEP 16 125523 6
AMTD 29 334275 7
FCAU 27 1493339 -1
KLAC 28 784370 4
Average 25 684377 4

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $684 million. That figure was $857 million in CMI’s case. TD Ameritrade Holding Corp. (NYSE:AMTD) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Cummins Inc. (NYSE:CMI) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on CMI, though not to the same extent, as the stock returned 39.9% during the same period and outperformed the market as well.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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