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Hedge Funds Are Done Buying Cincinnati Financial Corporation (CINF)?

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 (Recession is Imminent: We Need A Travel Ban NOW). 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 Cincinnati Financial Corporation (NASDAQ:CINF).

Hedge fund interest in Cincinnati Financial Corporation (NASDAQ:CINF) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare CINF to other stocks including Kansas City Southern (NYSE:KSU), International Paper Company (NYSE:IP), and Atmos Energy Corporation (NYSE:ATO) to get a better sense of its popularity.

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 51 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.

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to view the fresh hedge fund action encompassing Cincinnati Financial Corporation (NASDAQ:CINF).

Hedge fund activity in Cincinnati Financial Corporation (NASDAQ:CINF)

At the end of the first quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2019. By comparison, 21 hedge funds held shares or bullish call options in CINF a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

The largest stake in Cincinnati Financial Corporation (NASDAQ:CINF) was held by Select Equity Group, which reported holding $369.4 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $35 million position. Other investors bullish on the company included D E Shaw, Prospector Partners, and Millennium Management. In terms of the portfolio weights assigned to each position Select Equity Group allocated the biggest weight to Cincinnati Financial Corporation (NASDAQ:CINF), around 2.55% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, setting aside 1.82 percent of its 13F equity portfolio to CINF.

Because Cincinnati Financial Corporation (NASDAQ:CINF) has experienced bearish sentiment from the entirety of the hedge funds we track, logic holds that there was a specific group of money managers that slashed their full holdings in the first quarter. At the top of the heap, Michael Kharitonov and Jon David McAuliffe’s Voleon Capital dropped the biggest position of the “upper crust” of funds tracked by Insider Monkey, worth about $18.7 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dropped about $1.4 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Cincinnati Financial Corporation (NASDAQ:CINF) but similarly valued. We will take a look at Kansas City Southern (NYSE:KSU), International Paper Company (NYSE:IP), Atmos Energy Corporation (NYSE:ATO), and Dover Corporation (NYSE:DOV). This group of stocks’ market valuations match CINF’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KSU 45 524207 5
IP 29 242007 4
ATO 21 208767 -5
DOV 31 644941 2
Average 31.5 404981 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $405 million. That figure was $484 million in CINF’s case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand Atmos Energy Corporation (NYSE:ATO) is the least popular one with only 21 bullish hedge fund positions. Cincinnati Financial Corporation (NASDAQ:CINF) 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 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 8.3% in 2020 through the end of May and surpassed the market by 13.2 percentage points. Unfortunately CINF wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CINF investors were disappointed as the stock returned -21.9% during the second quarter 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.