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

The latest 13F reporting period has come and gone, and 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. Now, 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 you are going to find out whether hedge funds thoughtITT Inc. (NYSE:ITT) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Hedge fund interest in ITT Inc. (NYSE:ITT) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare ITT to other stocks including Lancaster Colony Corporation (NASDAQ:LANC), HollyFrontier Corporation (NYSE:HFC), and Telecom Argentina S.A. (NYSE:TEO) to get a better sense of its popularity.

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 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 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.

Lee Ainslie MAVERICK CAPITAL

Lee Ainslie of Maverick 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 glance at the key hedge fund action regarding ITT Inc. (NYSE:ITT).

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

Heading into the second quarter of 2020, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ITT over the last 18 quarters. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Adage Capital Management, managed by Phill Gross and Robert Atchinson, holds the largest position in ITT Inc. (NYSE:ITT). Adage Capital Management has a $116.4 million position in the stock, comprising 0.3% of its 13F portfolio. The second largest stake is held by Paradice Investment Management, led by David Paradice, holding a $70.1 million position; 7.8% of its 13F portfolio is allocated to the stock. Remaining professional money managers that hold long positions include Cliff Asness’s AQR Capital Management, Ken Griffin’s Citadel Investment Group and Mario Gabelli’s GAMCO Investors. In terms of the portfolio weights assigned to each position Paradice Investment Management allocated the biggest weight to ITT Inc. (NYSE:ITT), around 7.77% of its 13F portfolio. Lodge Hill Capital is also relatively very bullish on the stock, setting aside 1.99 percent of its 13F equity portfolio to ITT.

Seeing as ITT Inc. (NYSE:ITT) has faced falling interest from the entirety of the hedge funds we track, we can see that there were a few hedge funds that slashed their full holdings by the end of the first quarter. Interestingly, Clifton S. Robbins’s Blue Harbour Group said goodbye to the biggest position of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $103.5 million in stock, and Clint Carlson’s Carlson Capital was right behind this move, as the fund dumped about $45.5 million worth. These transactions are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as ITT Inc. (NYSE:ITT) but similarly valued. We will take a look at Lancaster Colony Corporation (NASDAQ:LANC), HollyFrontier Corporation (NYSE:HFC), Telecom Argentina S.A. (NYSE:TEO), and Mercury Systems Inc (NASDAQ:MRCY). This group of stocks’ market caps match ITT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LANC 23 180392 7
HFC 24 203908 -6
TEO 4 32332 -1
MRCY 12 47030 -12
Average 15.75 115916 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $116 million. That figure was $373 million in ITT’s case. HollyFrontier Corporation (NYSE:HFC) is the most popular stock in this table. On the other hand Telecom Argentina S.A. (NYSE:TEO) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks ITT Inc. (NYSE:ITT) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on ITT as the stock returned 29.9% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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