Hedge Funds Cashed Out Of Caterpillar Inc. (CAT) Too Early

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Caterpillar Inc. (NYSE:CAT) shareholders have witnessed a decrease in activity from the world’s largest hedge funds in recent months. CAT was in 37 hedge funds’ portfolios at the end of September. There were 45 hedge funds in our database with CAT positions at the end of the previous quarter. Our calculations also showed that CAT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

Video: Click the image to 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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a gander at the key hedge fund action surrounding Caterpillar Inc. (NYSE:CAT).

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

At Q3’s end, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the second quarter of 2019. On the other hand, there were a total of 63 hedge funds with a bullish position in CAT a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Bill & Melinda Gates Foundation Trust, managed by Michael Larson, holds the number one position in Caterpillar Inc. (NYSE:CAT). Bill & Melinda Gates Foundation Trust has a $1.4224 billion position in the stock, comprising 6.7% of its 13F portfolio. Sitting at the No. 2 spot is Fisher Asset Management, managed by Ken Fisher, which holds a $679.1 million position; 0.7% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism consist of David E. Shaw’s D E Shaw, Cliff Asness’s AQR Capital Management and Phill Gross and Robert Atchinson’s Adage Capital Management. 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 6.7% of its portfolio. Levin Capital Strategies is also relatively very bullish on the stock, earmarking 1.46 percent of its 13F equity portfolio to CAT.

Judging by the fact that Caterpillar Inc. (NYSE:CAT) has witnessed falling interest from the aggregate hedge fund industry, it’s safe to say that there were a few funds that slashed their entire stakes by the end of the third quarter. Interestingly, Andrew Sandler’s Sandler Capital Management dropped the biggest position of the “upper crust” of funds watched by Insider Monkey, totaling close to $40.9 million in call options. Alexander Mitchell’s fund, Scopus Asset Management, also said goodbye to its call options, about $27.3 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 8 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Caterpillar Inc. (NYSE:CAT). These stocks are Enbridge Inc (NYSE:ENB), Morgan Stanley (NYSE:MS), Fiserv, Inc. (NASDAQ:FISV), and Celgene Corporation (NASDAQ:CELG). This group of stocks’ market values match CAT’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 61.25 hedge funds with bullish positions and the average amount invested in these stocks was $5272 million. That figure was $2758 million in CAT’s case. Celgene Corporation (NASDAQ:CELG) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 18 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on CAT as the stock returned 15.5% during the first two months of Q4 and outperformed the market by an even larger margin.

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