How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cabot Corporation (NYSE:CBT) and determine whether hedge funds had an edge regarding this stock.
Cabot Corporation (NYSE:CBT) was in 18 hedge funds’ portfolios at the end of June. The all time high for this statistics is 29. CBT investors should be aware of a decrease in hedge fund sentiment of late. There were 23 hedge funds in our database with CBT positions at the end of the first quarter. Our calculations also showed that CBT 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.
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 56 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.
Ray Dalio of Bridgewater 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 real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to go over the latest hedge fund action encompassing Cabot Corporation (NYSE:CBT).
How have hedgies been trading Cabot Corporation (NYSE:CBT)?
Heading into the third quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CBT over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Cabot Corporation (NYSE:CBT) was held by AQR Capital Management, which reported holding $26.7 million worth of stock at the end of September. It was followed by Two Sigma Advisors with a $6 million position. Other investors bullish on the company included Renaissance Technologies, SIR Capital Management, and GLG Partners. In terms of the portfolio weights assigned to each position Invenomic Capital Management allocated the biggest weight to Cabot Corporation (NYSE:CBT), around 1.11% of its 13F portfolio. SIR Capital Management is also relatively very bullish on the stock, earmarking 0.72 percent of its 13F equity portfolio to CBT.
Since Cabot Corporation (NYSE:CBT) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few hedgies that slashed their full holdings last quarter. Intriguingly, Greg Eisner’s Engineers Gate Manager cut the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising about $1.7 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund sold off about $1.5 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds last quarter.
Let’s now review hedge fund activity in other stocks similar to Cabot Corporation (NYSE:CBT). We will take a look at Alcoa Corporation (NYSE:AA), First Majestic Silver Corp (NYSE:AG), The Goodyear Tire & Rubber Company (NASDAQ:GT), Palomar Holdings, Inc. (NASDAQ:PLMR), Guangshen Railway Co. Ltd (NYSE:GSH), Altra Industrial Motion Corp. (NASDAQ:AIMC), and Plexus Corp. (NASDAQ:PLXS). This group of stocks’ market valuations are closest to CBT’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AA | 33 | 402299 | 0 |
| AG | 14 | 106404 | 1 |
| GT | 21 | 184571 | -5 |
| PLMR | 15 | 76145 | 8 |
| GSH | 1 | 3274 | -1 |
| AIMC | 12 | 100558 | -3 |
| PLXS | 15 | 72081 | -1 |
| Average | 15.9 | 135047 | -0.1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.9 hedge funds with bullish positions and the average amount invested in these stocks was $135 million. That figure was $52 million in CBT’s case. Alcoa Corporation (NYSE:AA) is the most popular stock in this table. On the other hand Guangshen Railway Co. Ltd (NYSE:GSH) is the least popular one with only 1 bullish hedge fund positions. Cabot Corporation (NYSE:CBT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CBT is 45.2. 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 positive signal but 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately CBT wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CBT were disappointed as the stock returned -1.9% in Q3 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.
