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Did Hedge Funds Drop The Ball On Applied Industrial Technologies, Inc. (AIT) ?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Applied Industrial Technologies, Inc. (NYSE:AIT).

Applied Industrial Technologies, Inc. (NYSE:AIT) has experienced an increase in support from the world’s most elite money managers recently. AIT was in 20 hedge funds’ portfolios at the end of the third quarter of 2019. There were 18 hedge funds in our database with AIT positions at the end of the previous quarter. Our calculations also showed that AIT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 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.

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.

Clint Carlson of Carlson Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a gander at the key hedge fund action surrounding Applied Industrial Technologies, Inc. (NYSE:AIT).

Hedge fund activity in Applied Industrial Technologies, Inc. (NYSE:AIT)

Heading into the fourth quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AIT over the last 17 quarters. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

The largest stake in Applied Industrial Technologies, Inc. (NYSE:AIT) was held by Carlson Capital, which reported holding $21.9 million worth of stock at the end of September. It was followed by Millennium Management with a $17.9 million position. Other investors bullish on the company included Royce & Associates, Marshall Wace, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Applied Industrial Technologies, Inc. (NYSE:AIT), around 0.86% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, dishing out 0.4 percent of its 13F equity portfolio to AIT.

As aggregate interest increased, key money managers were breaking ground themselves. Marshall Wace, managed by Paul Marshall and Ian Wace, established the most outsized position in Applied Industrial Technologies, Inc. (NYSE:AIT). Marshall Wace had $10.5 million invested in the company at the end of the quarter. Renaissance Technologies also made a $7.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Muller’s PDT Partners, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Benjamin A. Smith’s Laurion Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Applied Industrial Technologies, Inc. (NYSE:AIT) but similarly valued. These stocks are Advanced Drainage Systems, Inc. (NYSE:WMS), Mimecast Limited (NASDAQ:MIME), Washington Real Estate Investment Trust (NYSE:WRE), and Stepan Company (NYSE:SCL). This group of stocks’ market valuations are similar to AIT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WMS 24 335640 7
MIME 36 669132 10
WRE 5 115764 -1
SCL 14 61752 3
Average 19.75 295572 4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $296 million. That figure was $106 million in AIT’s case. Mimecast Limited (NASDAQ:MIME) is the most popular stock in this table. On the other hand Washington Real Estate Investment Trust (NYSE:WRE) is the least popular one with only 5 bullish hedge fund positions. Applied Industrial Technologies, Inc. (NYSE:AIT) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on AIT as the stock returned 13% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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