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Caterpillar Inc. (CAT): Hedge Funds Taking A Lot Of Chips Off The Table

In this article we will check out the progression of hedge fund sentiment towards Caterpillar Inc. (NYSE:CAT) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Caterpillar Inc. (NYSE:CAT) was in 34 hedge funds’ portfolios at the end of March. CAT investors should pay attention to a decrease in hedge fund interest of late. There were 52 hedge funds in our database with CAT positions at the end of the previous quarter. Our calculations also showed that CAT isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 87% since March 2017 and outperformed the S&P 500 ETFs by more than 51 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ken Fisher FISHER ASSET MANAGEMENT

Ken Fisher of Fisher Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the 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 go over the recent hedge fund action regarding Caterpillar Inc. (NYSE:CAT).

How have hedgies been trading Caterpillar Inc. (NYSE:CAT)?

Heading into the second quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -35% from the fourth quarter of 2019. By comparison, 53 hedge funds held shares or bullish call options in CAT a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

Is CAT A Good Stock To Buy?

More specifically, Bill & Melinda Gates Foundation Trust was the largest shareholder of Caterpillar Inc. (NYSE:CAT), with a stake worth $1306.7 million reported as of the end of September. Trailing Bill & Melinda Gates Foundation Trust was Fisher Asset Management, which amassed a stake valued at $650.9 million. Citadel Investment Group, AQR Capital Management, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Caterpillar Inc. (NYSE:CAT), around 7.53% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, setting aside 2.88 percent of its 13F equity portfolio to CAT.

Due to the fact that Caterpillar Inc. (NYSE:CAT) has faced falling interest from the entirety of the hedge funds we track, we can see that there were a few funds that decided to sell off their full holdings heading into Q4. It’s worth mentioning that Anand Parekh’s Alyeska Investment Group cut the largest position of all the hedgies followed by Insider Monkey, valued at an estimated $94.1 million in stock. Robert Bishop’s fund, Impala Asset Management, also said goodbye to its stock, about $42.6 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 18 funds heading into Q4.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Caterpillar Inc. (NYSE:CAT) but similarly valued. We will take a look at Stryker Corporation (NYSE:SYK), Becton, Dickinson and Company (NYSE:BDX), CME Group Inc (NASDAQ:CME), and Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). This group of stocks’ market caps resemble CAT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SYK 48 903368 5
BDX 56 1266617 6
CME 62 2265510 8
VRTX 56 3313662 3
Average 55.5 1937289 5.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 55.5 hedge funds with bullish positions and the average amount invested in these stocks was $1937 million. That figure was $2187 million in CAT’s case. CME Group Inc (NASDAQ:CME) is the most popular stock in this table. On the other hand Stryker Corporation (NYSE:SYK) is the least popular one with only 48 bullish hedge fund positions. Compared to these stocks Caterpillar Inc. (NYSE:CAT) is even less popular than SYK. Hedge funds dodged a bullet by taking a bearish stance towards CAT. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 8.3% in 2020 through the end of May but managed to beat the market by 13.2 percentage points. Unfortunately CAT wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); CAT investors were disappointed as the stock returned 4.5% during the second quarter (through the end of May) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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