Did Hedge Funds Make The Right Call On Cummins Inc. (CMI)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cummins Inc. (NYSE:CMI) and determine whether hedge funds had an edge regarding this stock.

Cummins Inc. (NYSE:CMI) shareholders have witnessed a decrease in hedge fund interest recently. Our calculations also showed that CMI 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.

At the moment there are dozens of indicators investors put to use to evaluate their holdings. A duo of the most underrated indicators are hedge fund and insider trading sentiment. Our experts have shown that, historically, those who follow the best picks of the elite hedge fund managers can beat their index-focused peers by a solid margin (see the details here).

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

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 go over the fresh hedge fund action regarding Cummins Inc. (NYSE:CMI).

What have hedge funds been doing with Cummins Inc. (NYSE:CMI)?

At the end of the first quarter, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in CMI over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CMI A Good Stock To Buy?

The largest stake in Cummins Inc. (NYSE:CMI) was held by AQR Capital Management, which reported holding $167.1 million worth of stock at the end of September. It was followed by Laurion Capital Management with a $48.4 million position. Other investors bullish on the company included Citadel Investment Group, D E Shaw, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Arjuna Capital allocated the biggest weight to Cummins Inc. (NYSE:CMI), around 1.25% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, setting aside 1 percent of its 13F equity portfolio to CMI.

Seeing as Cummins Inc. (NYSE:CMI) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there is a sect of hedgies who sold off their positions entirely in the first quarter. Intriguingly, Ken Griffin’s Citadel Investment Group sold off the largest investment of the 750 funds monitored by Insider Monkey, comprising about $81.1 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund cut about $38.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 5 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Cummins Inc. (NYSE:CMI) but similarly valued. We will take a look at Liberty Broadband Corp (NASDAQ:LBRDK), ING Groep N.V. (NYSE:ING), Splunk Inc (NASDAQ:SPLK), and Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN). This group of stocks’ market valuations resemble CMI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LBRDK 45 3334060 -1
ING 13 298860 -1
SPLK 37 340300 -1
ALXN 56 3058097 8
Average 37.75 1757829 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.75 hedge funds with bullish positions and the average amount invested in these stocks was $1758 million. That figure was $327 million in CMI’s case. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is the most popular stock in this table. On the other hand ING Groep N.V. (NYSE:ING) is the least popular one with only 13 bullish hedge fund positions. Cummins Inc. (NYSE:CMI) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 10 most popular stocks among hedge funds 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on CMI as the stock returned 29.1% during the second quarter and outperformed the market by an even larger margin.

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