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Did Hedge Funds Make The Right Call On Illinois Tool Works Inc. (ITW) ?

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 Illinois Tool Works Inc. (NYSE:ITW) based on that data and determine whether they were really smart about the stock.

Is Illinois Tool Works Inc. (NYSE:ITW) undervalued? The smart money was taking a bullish view. The number of long hedge fund positions moved up by 2 recently. Our calculations also showed that ITW 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). ITW was in 34 hedge funds’ portfolios at the end of March. There were 32 hedge funds in our database with ITW holdings at the end of the previous quarter.

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

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

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 peek at the fresh hedge fund action surrounding Illinois Tool Works Inc. (NYSE:ITW).

How are hedge funds trading Illinois Tool Works Inc. (NYSE:ITW)?

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 6% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ITW over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in Illinois Tool Works Inc. (NYSE:ITW), which was worth $78 million at the end of the third quarter. On the second spot was Markel Gayner Asset Management which amassed $46.5 million worth of shares. Two Sigma Advisors, Renaissance Technologies, and Citadel Investment Group 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 Trellus Management Company allocated the biggest weight to Illinois Tool Works Inc. (NYSE:ITW), around 2.37% of its 13F portfolio. Arjuna Capital is also relatively very bullish on the stock, earmarking 1.95 percent of its 13F equity portfolio to ITW.

Now, some big names have jumped into Illinois Tool Works Inc. (NYSE:ITW) headfirst. Renaissance Technologies, initiated the most outsized position in Illinois Tool Works Inc. (NYSE:ITW). Renaissance Technologies had $30.2 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $17.5 million position during the quarter. The other funds with new positions in the stock are David Costen Haley’s HBK Investments, D. E. Shaw’s D E Shaw, and Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management.

Let’s now review hedge fund activity in other stocks similar to Illinois Tool Works Inc. (NYSE:ITW). We will take a look at Ecolab Inc. (NYSE:ECL), Intercontinental Exchange Inc (NYSE:ICE), CSX Corporation (NASDAQ:CSX), and Air Products & Chemicals, Inc. (NYSE:APD). This group of stocks’ market valuations match ITW’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ECL 38 1597530 -6
ICE 61 2491084 9
CSX 57 2811477 11
APD 41 352215 -13
Average 49.25 1813077 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 49.25 hedge funds with bullish positions and the average amount invested in these stocks was $1813 million. That figure was $297 million in ITW’s case. Intercontinental Exchange Inc (NYSE:ICE) is the most popular stock in this table. On the other hand Ecolab Inc. (NYSE:ECL) is the least popular one with only 38 bullish hedge fund positions. Compared to these stocks Illinois Tool Works Inc. (NYSE:ITW) is even less popular than ECL. 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 but managed to beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on ITW, though not to the same extent, as the stock returned 23.8% during the second quarter and outperformed the market as well.

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