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Bank of Montreal (USA) (BMO) Downgrade Shrugged Off As Investors Take Solace in Job Cuts, Dividend Hike

Bank of Montreal (USA) (NYSE:BMO) shares are trending today after analysts at TD Securities downgraded the stock to ‘Hold’ from ‘Buy’. The analysts cited softer-than-expected earnings for the company’s second quarter of fiscal year 2016 and moderate growth in Canada’s commercial and personal banking sector as reasons for the ratings change. Despite the downgrade, shares of Bank of Montreal are down just a tick in morning trading, perhaps due to the fact that the financial services company pays an annual dividend that amounts to a 4% yield. The bank recently raised its quarterly dividend to CAD$0.86 per share ($0.66) from the previous CAD$0.84 per share ($0.65). It also announced that it will cut 1,850 jobs or about 4% of its workforce.

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Ackman’s recent Valeant losses). However, it is still good idea to keep an eye on hedge fund activity (see the details here). With this in mind, as the latest round of 13F filings has just ended, let’s examine the smart money sentiment towards Bank of Montreal (USA) (NYSE:BMO).

Bank of Montreal (USA) (NYSE:BMO) shares didn’t see a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged, with the stock being in 12 hedge funds’ portfolios at the end of March. 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 Monsanto Company (NYSE:MON), Syngenta AG (ADR) (NYSE:SYT), and Cognizant Technology Solutions Corp (NASDAQ:CTSH) to gather more data points.

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According to Insider Monkey’s hedge fund database, Cliff Asness’ AQR Capital Management has the largest position in Bank of Montreal (USA) (NYSE:BMO), worth close to $78.2 million, accounting for 0.1% of its total 13F portfolio. On AQR Capital Management’s heels is Robert B. Gillam of McKinley Capital Management, with a $20.5 million position; 1% of his fund’s 13F portfolio is allocated to the company. Some other members of the smart money that hold long positions consist of Jim Simons’ Renaissance Technologies, Israel Englander’s Millennium Management, and Paul Orlin and Alex Porter’s Amici Capital.

On the next page we’ll compare the stock to a handful of others with similar market caps.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Bank of Montreal (USA) (NYSE:BMO) but similarly valued. We will take a look at Monsanto Company (NYSE:MON), Syngenta AG (ADR) (NYSE:SYT), Cognizant Technology Solutions Corp (NASDAQ:CTSH), and Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). This group of stocks’ market values are similar to BMO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MON 51 2450184 13
SYT 32 524358 6
CTSH 38 801492 -6
PBR 23 224726 -1

As you can see these stocks had an average of 36 hedge funds with bullish positions and the average amount invested in these stocks was $1.00 billion. That figure was $152 million in BMO’s case. Monsanto Company (NYSE:MON) is the most popular stock in this table. On the other hand Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Bank of Montreal (USA) (NYSE:BMO) is even less popular than PBR. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

Disclosure: None

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