Do Hedge Funds Agree with Jim Cramer on These Hot Stocks?

For various reasons, Jim Cramer, the current host of Mad Money, has been a fan of several stocks, namely, General Electric Company (NYSE:GE), Honeywell International Inc. (NYSE:HON), Alcoa Inc (NYSE:AA) and Pure Storage Inc (NYSE:PSTG), lately. Given consensus is always better than a lone bull, let’s examine whether the smart money agrees with Cramer’s picks.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 102% over the last 37 months and outperformed the S&P 500 ETF (SPY) by 53 percentage points (see the details here).

Given that Jim Cramer is a big believer in market wisdom, it is not surprising he likes General Electric Company (NYSE:GE), the best performing industrial stock of 2015. CEO Jeffrey Immelt is returning General Electric back to its industrial roots by selling GE Capital piecemeal and focusing more on the industrial and innovation sectors. Immelt is also using the money garnered to buy back tens of billions of dollars of stock, which should increase EPS. Shares of GE trade at a reasonable forward P/E of 18.2 and yield a dividend of 3.28%

Many hedge funds from our database own shares of General Electric, although their stakes amassed only 1.40% of the company at the end of the second quarter. Of the around 730 funds from our database, 70 funds held $3.72 billion worth of the company’s shares at the end of June, up from 62 funds and $3.13 billion respectively a quarter earlier.  Ken Fisher‘s Fisher Asset Management upped its stake by 2% on the quarter to 30.71 million shares, while Phill Gross and Robert Atchinson’s Adage Capital Management increased its position by 35% to 19.35 million shares. Nelson Peltz’s Trian has recently bought a $2.5 billion stake in the company (see details).

Cramer also likes Honeywell International Inc. (NYSE:HON), which makes industrial energy efficiency equipment that will be in strong demand when energy prices rise or global warming concerns increase. Shares are up 2.7% year to date and trade at a reasonable forward P/E of 15. The weak Chinese economy is a concern, but Honeywell’s long term future in the country is still promising.

Although Cramer likes the stock, our data shows hedge funds are ambivalent on Honeywell International Inc. (NYSE:HON). A total of 49 funds reported stakes worth $1.31 billion (representing 1.60% of the float) in the latest round of 13F filings, up slightly from 48 funds and $1.29 billion a quarter earlier. GAMCO Investors owns 2.17 million shares.

Cramer thinks Alcoa Inc (NYSE:AA) is a great long term holding ‘pending the breakup into two companies’. Alcoa has been around for more than a century, and makes high quality end commodity products that are used in a disparate number of growing industries. Its shares trade at a forward P/E of 13.3 and have a dividend yield of 1.17%. Our data show that hedge funds agree with Cramer on Alcoa Inc (NYSE:AA) as 45 funds were long the stock in the second quarter, up by two from the prior quarter. The value of the smart money’s collective holdings in the stock increased to $1.12 billion at the end of June, up $30 million from the end of March and amassed 8.30% of the company. Robert Rodriguez and Steven Romick‘s First Pacific Advisors holds 34.89 million shares.

Last but not least Cramer is a fan of Pure Storage Inc (NYSE:PSTG), a fast growing, tech company that makes advanced flash memory chips based on data storage arrays. Cramer believes the stock is a good long term holding and that any ‘weakness could be a nice buying opportunity’ as long as investors use limit orders and build their positions slowly.

Since Pure Storage Inc (NYSE:PSTG) has just gone public, we don’t have hedge fund data concerning the stock yet, but we note many tech stocks coming out of the gate have historically been momentum stocks that sometimes weaken before their six-month IPO lockup periods.

Disclosure: None