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

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 thoughtTextron Inc. (NYSE:TXT) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Textron Inc. (NYSE:TXT) investors should pay attention to a decrease in hedge fund interest in recent months. TXT was in 22 hedge funds’ portfolios at the end of March. There were 30 hedge funds in our database with TXT positions at the end of the previous quarter. Our calculations also showed that TXT 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.

James Mitarotonda Barington Capital

James A. Mitarotonda of Barington Capital Group

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to analyze the latest hedge fund action surrounding Textron Inc. (NYSE:TXT).

How are hedge funds trading Textron Inc. (NYSE:TXT)?

At the end of the first quarter, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TXT over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, GAMCO Investors held the most valuable stake in Textron Inc. (NYSE:TXT), which was worth $70.8 million at the end of the third quarter. On the second spot was D E Shaw which amassed $42.6 million worth of shares. AQR Capital Management, Levin Easterly Partners, and Point72 Asset Management 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 Barington Capital Group allocated the biggest weight to Textron Inc. (NYSE:TXT), around 4.35% of its 13F portfolio. Lodge Hill Capital is also relatively very bullish on the stock, setting aside 1.87 percent of its 13F equity portfolio to TXT.

Seeing as Textron Inc. (NYSE:TXT) has faced falling interest from the entirety of the hedge funds we track, it’s easy to see that there were a few hedge funds that decided to sell off their full holdings last quarter. At the top of the heap, Andreas Halvorsen’s Viking Global cut the biggest position of all the hedgies followed by Insider Monkey, comprising about $220.5 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dumped about $27.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 8 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Textron Inc. (NYSE:TXT). These stocks are Watsco Inc (NYSE:WSO), StoneCo Ltd. (NASDAQ:STNE), Fortune Brands Home & Security Inc (NYSE:FBHS), and Halliburton Company (NYSE:HAL). This group of stocks’ market caps match TXT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WSO 20 173809 -3
STNE 34 615449 5
FBHS 31 640066 -3
HAL 32 513523 1
Average 29.25 485712 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $486 million. That figure was $230 million in TXT’s case. StoneCo Ltd. (NASDAQ:STNE) is the most popular stock in this table. On the other hand Watsco Inc (NYSE:WSO) is the least popular one with only 20 bullish hedge fund positions. Textron Inc. (NYSE:TXT) 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 but beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on TXT, though not to the same extent, as the stock returned 23.5% during the second quarter and outperformed the market.

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