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Hedge Funds Done Buying Johnson Controls International plc (JCI)?

In this article we will check out the progression of hedge fund sentiment towards Johnson Controls International plc (NYSE:JCI) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Hedge fund interest in Johnson Controls International plc (NYSE:JCI) 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 JCI to other stocks including Kellogg Company (NYSE:K), Waste Connections, Inc. (NYSE:WCN), and Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) to get a better sense of its popularity.

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 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. 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.

Charles Davidson - Wexford Capital

Charles Davidson of Wexford Capital

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. Keeping this in mind let’s take a look at the key hedge fund action regarding Johnson Controls International plc (NYSE:JCI).

How have hedgies been trading Johnson Controls International plc (NYSE:JCI)?

Heading into the second quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in JCI a year ago. With hedge funds’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

Among these funds, Citadel Investment Group held the most valuable stake in Johnson Controls International plc (NYSE:JCI), which was worth $311.2 million at the end of the third quarter. On the second spot was D E Shaw which amassed $116.9 million worth of shares. Balyasny Asset Management, Diamond Hill Capital, and Arrowstreet Capital 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 Scopia Capital allocated the biggest weight to Johnson Controls International plc (NYSE:JCI), around 6.52% of its 13F portfolio. Arosa Capital Management is also relatively very bullish on the stock, earmarking 1.11 percent of its 13F equity portfolio to JCI.

Seeing as Johnson Controls International plc (NYSE:JCI) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of hedge funds who were dropping their full holdings heading into Q4. At the top of the heap, Phill Gross and Robert Atchinson’s Adage Capital Management dropped the largest stake of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $116.7 million in stock, and Joel Greenblatt’s Gotham Asset Management was right behind this move, as the fund said goodbye to about $28.1 million worth. These moves are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to Johnson Controls International plc (NYSE:JCI). We will take a look at Kellogg Company (NYSE:K), Waste Connections, Inc. (NYSE:WCN), Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), and Cummins Inc. (NYSE:CMI). This group of stocks’ market valuations resemble JCI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
K 37 610512 7
WCN 33 464735 -4
BBVA 8 142085 0
CMI 34 326816 -5
Average 28 386037 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $386 million. That figure was $1064 million in JCI’s case. Kellogg Company (NYSE:K) is the most popular stock in this table. On the other hand Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) is the least popular one with only 8 bullish hedge fund positions. Johnson Controls International plc (NYSE:JCI) is not the most popular stock in this group but hedge fund interest is still above average. 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 8.3% in 2020 through the end of May but beat the market by 13.2 percentage points. Unfortunately JCI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on JCI were disappointed as the stock returned 16.5% 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 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.

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