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Hedge Funds Are Crazy About Caterpillar Inc. (CAT)

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published this article and predicted that US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Caterpillar Inc. (NYSE:CAT)? The smart money sentiment can provide an answer to this question.

Is Caterpillar Inc. (NYSE:CAT) a bargain? Hedge funds are in a bullish mood. The number of bullish hedge fund bets moved up by 13 lately. Our calculations also showed that CAT isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 41 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.

Jonathan Barrett Luminus Management

Jonathan Barrett of Luminus Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Now let’s check out the recent hedge fund action surrounding Caterpillar Inc. (NYSE:CAT).

How are hedge funds trading Caterpillar Inc. (NYSE:CAT)?

At Q4’s end, a total of 52 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33% from one quarter earlier. By comparison, 60 hedge funds held shares or bullish call options in CAT a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Among these funds, Bill & Melinda Gates Foundation Trust held the most valuable stake in Caterpillar Inc. (NYSE:CAT), which was worth $1663 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $819.2 million worth of shares. Citadel Investment Group, Adage Capital Management, and Alyeska 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 Bill & Melinda Gates Foundation Trust allocated the biggest weight to Caterpillar Inc. (NYSE:CAT), around 7.79% of its 13F portfolio. Bronson Point Partners is also relatively very bullish on the stock, earmarking 4.02 percent of its 13F equity portfolio to CAT.

As industrywide interest jumped, key hedge funds have jumped into Caterpillar Inc. (NYSE:CAT) headfirst. Scopus Asset Management, managed by Alexander Mitchell, initiated the biggest position in Caterpillar Inc. (NYSE:CAT). Scopus Asset Management had $21.6 million invested in the company at the end of the quarter. Michael Cowley’s Sandbar Asset Management also made a $11.9 million investment in the stock during the quarter. The following funds were also among the new CAT investors: Sara Nainzadeh’s Centenus Global Management, Gregg Moskowitz’s Interval Partners, and Jonathan Barrett and Paul Segal’s Luminus Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Caterpillar Inc. (NYSE:CAT) but similarly valued. These stocks are The Goldman Sachs Group, Inc. (NYSE:GS), Enbridge Inc (NYSE:ENB), Mondelez International Inc (NASDAQ:MDLZ), and Fiserv, Inc. (NASDAQ:FISV). This group of stocks’ market valuations match CAT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GS 75 7581397 -3
ENB 21 285809 1
MDLZ 50 2343152 -6
FISV 78 4174064 -2
Average 56 3596106 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 56 hedge funds with bullish positions and the average amount invested in these stocks was $3596 million. That figure was $3228 million in CAT’s case. Fiserv, Inc. (NASDAQ:FISV) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 21 bullish hedge fund positions. Caterpillar Inc. (NYSE:CAT) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but beat the market by 1.9 percentage points. Unfortunately CAT wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CAT investors were disappointed as the stock returned -29% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.

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

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