Did Hedge Funds Make The Right Call On Caterpillar Inc. (CAT) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Caterpillar Inc. (NYSE:CAT) based on that data and determine whether they were really smart about the stock.

Caterpillar Inc. (NYSE:CAT) has seen a decrease in hedge fund sentiment lately. CAT was in 34 hedge funds’ portfolios at the end of March. 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.

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 58 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the fresh hedge fund action encompassing Caterpillar Inc. (NYSE:CAT).

Hedge fund activity in Caterpillar Inc. (NYSE:CAT)

At Q1’s end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -35% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in CAT over the last 18 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

The largest stake in Caterpillar Inc. (NYSE:CAT) was held by Bill & Melinda Gates Foundation Trust, which reported holding $1306.7 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $650.9 million position. Other investors bullish on the company included Citadel Investment Group, AQR Capital Management, and Millennium Management. 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, dishing out 2.88 percent of its 13F equity portfolio to CAT.

Because Caterpillar Inc. (NYSE:CAT) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there exists a select few money managers that elected to cut their full holdings heading into Q4. It’s worth mentioning that Anand Parekh’s Alyeska Investment Group sold off the largest stake of the “upper crust” of funds monitored by Insider Monkey, valued at close to $94.1 million in stock, and Robert Bishop’s Impala Asset Management was right behind this move, as the fund cut about $42.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 18 funds heading into Q4.

Let’s check out 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 values are similar to CAT’s market value.

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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 12.3% in 2020 through June 30th but managed to beat the market by 15.5 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 10% during the second quarter 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.

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