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Did Hedge Funds Make The Right Call On Eaton Corporation plc (ETN) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Eaton Corporation plc (NYSE:ETN) and determine whether the smart money was really smart about this stock.

Eaton Corporation plc (NYSE:ETN) investors should pay attention to a decrease in hedge fund sentiment lately. ETN was in 35 hedge funds’ portfolios at the end of the first quarter of 2020. There were 42 hedge funds in our database with ETN holdings at the end of the previous quarter. Our calculations also showed that ETN 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.

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

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 let’s take a peek at the new hedge fund action encompassing Eaton Corporation plc (NYSE:ETN).

How are hedge funds trading Eaton Corporation plc (NYSE:ETN)?

Heading into the second quarter of 2020, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ETN over the last 18 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Is ETN A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Citadel Investment Group, managed by Ken Griffin, holds the most valuable position in Eaton Corporation plc (NYSE:ETN). Citadel Investment Group has a $169.3 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is AQR Capital Management, managed by Cliff Asness, which holds a $158.9 million position; 0.3% of its 13F portfolio is allocated to the company. Remaining peers with similar optimism include Brandon Haley’s Holocene Advisors, Alex Snow’s Lansdowne Partners and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position Lansdowne Partners allocated the biggest weight to Eaton Corporation plc (NYSE:ETN), around 4.71% of its 13F portfolio. Bronson Point Partners is also relatively very bullish on the stock, setting aside 3.72 percent of its 13F equity portfolio to ETN.

Because Eaton Corporation plc (NYSE:ETN) has experienced declining sentiment from hedge fund managers, it’s safe to say that there exists a select few hedge funds who sold off their positions entirely heading into Q4. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dumped the biggest position of all the hedgies followed by Insider Monkey, totaling about $104.9 million in stock. Richard SchimeláandáLawrence Sapanski’s fund, Cinctive Capital Management, also sold off its stock, about $17.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 7 funds heading into Q4.

Let’s go over hedge fund activity in other stocks similar to Eaton Corporation plc (NYSE:ETN). These stocks are FedEx Corporation (NYSE:FDX), Xcel Energy Inc (NYSE:XEL), Kinder Morgan Inc (NYSE:KMI), and TAL Education Group (NYSE:TAL). This group of stocks’ market caps resemble ETN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FDX 50 1092300 5
XEL 24 394426 9
KMI 47 947312 7
TAL 38 1801280 8
Average 39.75 1058830 7.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.75 hedge funds with bullish positions and the average amount invested in these stocks was $1059 million. That figure was $824 million in ETN’s case. FedEx Corporation (NYSE:FDX) is the most popular stock in this table. On the other hand Xcel Energy Inc (NYSE:XEL) is the least popular one with only 24 bullish hedge fund positions. Eaton Corporation plc (NYSE:ETN) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 surpassed the market by 15.5 percentage points. Unfortunately ETN wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ETN investors were disappointed as the stock returned 13.7% 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 in 2020.

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