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Hedge Funds Are Dipping Their Toes Into Emerson Electric Co. (EMR)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Emerson Electric Co. (NYSE:EMR) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Emerson Electric Co. (NYSE:EMR) investors should be aware of an increase in enthusiasm from smart money lately. Emerson Electric Co. (NYSE:EMR) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 44. There were 33 hedge funds in our database with EMR holdings at the end of March. Our calculations also showed that EMR isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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.

NAVELLIER & ASSOCIATES

Louis Navellier of Navellier & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s view the fresh hedge fund action regarding Emerson Electric Co. (NYSE:EMR).

How have hedgies been trading Emerson Electric Co. (NYSE:EMR)?

At the end of the second quarter, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. By comparison, 32 hedge funds held shares or bullish call options in EMR a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Appaloosa Management LP held the most valuable stake in Emerson Electric Co. (NYSE:EMR), which was worth $86.8 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $82.1 million worth of shares. D E Shaw, AQR Capital Management, and Two Sigma Advisors 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 Galibier Capital Management allocated the biggest weight to Emerson Electric Co. (NYSE:EMR), around 4.63% of its 13F portfolio. Appian Way Asset Management is also relatively very bullish on the stock, dishing out 4.47 percent of its 13F equity portfolio to EMR.

As industrywide interest jumped, specific money managers have been driving this bullishness. Appaloosa Management LP, managed by David Tepper, assembled the largest position in Emerson Electric Co. (NYSE:EMR). Appaloosa Management LP had $86.8 million invested in the company at the end of the quarter. Andrew Byington’s Appian Way Asset Management also made a $7.7 million investment in the stock during the quarter. The following funds were also among the new EMR investors: Louis Bacon’s Moore Global Investments, Louis Navellier’s Navellier & Associates, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Emerson Electric Co. (NYSE:EMR) but similarly valued. These stocks are eBay Inc (NASDAQ:EBAY), Centene Corporation (NYSE:CNC), FedEx Corporation (NYSE:FDX), L3Harris Technologies, Inc. (NYSE:LHX), Monster Beverage Corp (NASDAQ:MNST), General Motors Company (NYSE:GM), and Exelon Corporation (NASDAQ:EXC). This group of stocks’ market valuations resemble EMR’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EBAY 58 5017459 6
CNC 71 3079774 5
FDX 46 1254577 -4
LHX 50 1312574 7
MNST 35 1880728 -8
GM 69 4380069 16
EXC 30 772535 -3
Average 51.3 2528245 2.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.3 hedge funds with bullish positions and the average amount invested in these stocks was $2528 million. That figure was $422 million in EMR’s case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand Exelon Corporation (NASDAQ:EXC) is the least popular one with only 30 bullish hedge fund positions. Emerson Electric Co. (NYSE:EMR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for EMR is 39.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately EMR wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); EMR investors were disappointed as the stock returned 12.8% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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