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2019 Review: Top Hedge Fund Stocks vs. Illinois Tool Works Inc. (ITW)

It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds’ favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like Illinois Tool Works Inc. (NYSE:ITW) and compare its performance against hedge funds’ favorite stocks.

Hedge fund interest in Illinois Tool Works Inc. (NYSE:ITW) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Walgreens Boots Alliance Inc (NASDAQ:WBA), Suncor Energy Inc. (NYSE:SU), and America Movil SAB de CV (NYSE:AMX) to gather more data points. Our calculations also showed that ITW 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).

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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset 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 let’s review the new hedge fund action regarding Illinois Tool Works Inc. (NYSE:ITW).

What does smart money think about Illinois Tool Works Inc. (NYSE:ITW)?

At Q3’s end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ITW over the last 17 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

The largest stake in Illinois Tool Works Inc. (NYSE:ITW) was held by AQR Capital Management, which reported holding $47.9 million worth of stock at the end of September. It was followed by Markel Gayner Asset Management with a $44.8 million position. Other investors bullish on the company included Ariel Investments, Nitorum Capital, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Nitorum Capital allocated the biggest weight to Illinois Tool Works Inc. (NYSE:ITW), around 2.19% of its 13F portfolio. Markel Gayner Asset Management is also relatively very bullish on the stock, setting aside 0.68 percent of its 13F equity portfolio to ITW.

Due to the fact that Illinois Tool Works Inc. (NYSE:ITW) has experienced a decline in interest from the smart money, it’s easy to see that there is a sect of hedgies who sold off their full holdings heading into Q4. At the top of the heap, Phill Gross and Robert Atchinson’s Adage Capital Management dropped the biggest position of the “upper crust” of funds followed by Insider Monkey, totaling close to $31.6 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace was right behind this move, as the fund cut about $1.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Illinois Tool Works Inc. (NYSE:ITW) but similarly valued. We will take a look at Walgreens Boots Alliance Inc (NASDAQ:WBA), Suncor Energy Inc. (NYSE:SU), America Movil SAB de CV (NYSE:AMX), and Equinix, Inc. (REIT) (NASDAQ:EQIX). This group of stocks’ market caps match ITW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WBA 34 831418 -7
SU 37 1416790 5
AMX 9 188555 0
EQIX 33 1580931 -5
Average 28.25 1004424 -1.75

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 $1004 million. That figure was $335 million in ITW’s case. Suncor Energy Inc. (NYSE:SU) is the most popular stock in this table. On the other hand America Movil SAB de CV (NYSE:AMX) is the least popular one with only 9 bullish hedge fund positions. Illinois Tool Works Inc. (NYSE:ITW) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on ITW as the stock returned 45.9% in 2019 through December 23rd and outperformed the market by an even larger margin.
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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