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Did Hedge Funds Make The Right Call On The Timken Company (TKR) ?

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 thoughtThe Timken Company (NYSE:TKR) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is The Timken Company (NYSE:TKR) worth your attention right now? The best stock pickers were taking a pessimistic view. The number of long hedge fund bets were trimmed by 10 recently. Our calculations also showed that TKR 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.

Alex Litowitz Magnetar Capital

Alec Litowitz of Magnetar Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. With all of this in mind let’s take a peek at the new hedge fund action encompassing The Timken Company (NYSE:TKR).

How have hedgies been trading The Timken Company (NYSE:TKR)?

At the end of the first quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TKR 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.

Among these funds, Adage Capital Management held the most valuable stake in The Timken Company (NYSE:TKR), which was worth $83.3 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $52.2 million worth of shares. Citadel Investment Group, Arrowstreet Capital, and Balyasny 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 Sandbar Asset Management allocated the biggest weight to The Timken Company (NYSE:TKR), around 1.56% of its 13F portfolio. Diametric Capital is also relatively very bullish on the stock, dishing out 1.47 percent of its 13F equity portfolio to TKR.

Due to the fact that The Timken Company (NYSE:TKR) has experienced a decline in interest from the smart money, it’s safe to say that there lies a certain “tier” of hedgies that slashed their positions entirely by the end of the first quarter. Interestingly, Louis Bacon’s Moore Global Investments said goodbye to the largest investment of all the hedgies watched by Insider Monkey, comprising about $14.2 million in stock. Javier Velazquez’s fund, Albar Capital, also sold off its stock, about $12.6 million worth. These transactions are important to note, as total hedge fund interest dropped by 10 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks similar to The Timken Company (NYSE:TKR). We will take a look at Shenandoah Telecommunications Company (NASDAQ:SHEN), Toll Brothers Inc (NYSE:TOL), California Water Service Group (NYSE:CWT), and Eagle Materials, Inc. (NYSE:EXP). This group of stocks’ market caps are similar to TKR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SHEN 11 97332 1
TOL 20 238559 -11
CWT 16 29065 -4
EXP 34 344795 -4
Average 20.25 177438 -4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $177 million. That figure was $263 million in TKR’s case. Eagle Materials, Inc. (NYSE:EXP) is the most popular stock in this table. On the other hand Shenandoah Telecommunications Company (NASDAQ:SHEN) is the least popular one with only 11 bullish hedge fund positions. The Timken Company (NYSE:TKR) is not the most popular stock in this group but hedge fund interest is still above 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 still beat the market by 15.5 percentage points. Hedge funds were also right about betting on TKR as the stock returned 41.6% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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