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Canon Inc. (CAJ): Hedge Funds Are Undecided

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 835 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Canon Inc. (NYSE:CAJ) in this article.

Canon Inc. (NYSE:CAJ) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds’ portfolios at the end of the fourth quarter of 2019. 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 WEC Energy Group, Inc. (NYSE:WEC), Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), and State Street Corporation (NYSE:STT) to gather more data points. Our calculations also showed that CAJ isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 outperformance 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 more than 41 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance 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 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the recent hedge fund action encompassing Canon Inc. (NYSE:CAJ).

How are hedge funds trading Canon Inc. (NYSE:CAJ)?

Heading into the first quarter of 2020, a total of 8 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 6 hedge funds with a bullish position in CAJ a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Canon Inc. (NYSE:CAJ) was held by Renaissance Technologies, which reported holding $49.3 million worth of stock at the end of September. It was followed by D E Shaw with a $9.4 million position. Other investors bullish on the company included Arrowstreet Capital, LMR Partners, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position LMR Partners allocated the biggest weight to Canon Inc. (NYSE:CAJ), around 0.12% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, setting aside 0.04 percent of its 13F equity portfolio to CAJ.

Due to the fact that Canon Inc. (NYSE:CAJ) has experienced declining sentiment from hedge fund managers, we can see that there was a specific group of funds that slashed their positions entirely in the third quarter. Interestingly, Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital said goodbye to the largest position of all the hedgies watched by Insider Monkey, comprising about $0.6 million in call options, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund dropped about $0.3 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Canon Inc. (NYSE:CAJ) but similarly valued. We will take a look at WEC Energy Group, Inc. (NYSE:WEC), Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), State Street Corporation (NYSE:STT), and The Williams Companies, Inc. (NYSE:WMB). This group of stocks’ market values match CAJ’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WEC 15 211776 -7
ERIC 18 367933 -2
STT 45 1286711 8
WMB 40 958886 0
Average 29.5 706327 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $706 million. That figure was $70 million in CAJ’s case. State Street Corporation (NYSE:STT) is the most popular stock in this table. On the other hand WEC Energy Group, Inc. (NYSE:WEC) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Canon Inc. (NYSE:CAJ) is even less popular than WEC. Hedge funds dodged a bullet by taking a bearish stance towards CAJ. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but managed to beat the market by 3.1 percentage points. Unfortunately CAJ wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CAJ investors were disappointed as the stock returned -18.4% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in Q1.

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

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