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Hedge Funds Still Bullish On ITT Inc. (ITT)

In this article we will check out the progression of hedge fund sentiment towards ITT Inc. (NYSE:ITT) 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.

ITT Inc. (NYSE:ITT) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 28 hedge funds’ portfolios at the end of the first quarter of 2020. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Lancaster Colony Corporation (NASDAQ:LANC), HollyFrontier Corporation (NYSE:HFC), and Telecom Argentina S.A. (NYSE:TEO) to gather more data points. Our calculations also showed that ITT isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Sander Gerber of Hudson Bay Capital

Sander Gerber of Hudson Bay 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 as well as this tiny lithium play. 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 take a peek at the latest hedge fund action encompassing ITT Inc. (NYSE:ITT).

How have hedgies been trading ITT Inc. (NYSE:ITT)?

Heading into the second quarter of 2020, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 22 hedge funds with a bullish position in ITT 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).

The largest stake in ITT Inc. (NYSE:ITT) was held by Adage Capital Management, which reported holding $116.4 million worth of stock at the end of September. It was followed by Paradice Investment Management with a $70.1 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and GAMCO Investors. In terms of the portfolio weights assigned to each position Paradice Investment Management allocated the biggest weight to ITT Inc. (NYSE:ITT), around 7.77% of its 13F portfolio. Lodge Hill Capital is also relatively very bullish on the stock, setting aside 1.99 percent of its 13F equity portfolio to ITT.

Seeing as ITT Inc. (NYSE:ITT) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few hedgies that decided to sell off their positions entirely in the first quarter. Intriguingly, Clifton S. Robbins’s Blue Harbour Group said goodbye to the largest stake of the 750 funds watched by Insider Monkey, comprising an estimated $103.5 million in stock, and Clint Carlson’s Carlson Capital was right behind this move, as the fund dumped about $45.5 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as ITT Inc. (NYSE:ITT) but similarly valued. We will take a look at Lancaster Colony Corporation (NASDAQ:LANC), HollyFrontier Corporation (NYSE:HFC), Telecom Argentina S.A. (NYSE:TEO), and Mercury Systems Inc (NASDAQ:MRCY). This group of stocks’ market caps resemble ITT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LANC 23 180392 7
HFC 24 203908 -6
TEO 4 32332 -1
MRCY 12 47030 -12
Average 15.75 115916 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $116 million. That figure was $373 million in ITT’s case. HollyFrontier Corporation (NYSE:HFC) is the most popular stock in this table. On the other hand Telecom Argentina S.A. (NYSE:TEO) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks ITT Inc. (NYSE:ITT) is more popular among hedge funds. 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 returned 8.3% in 2020 through the end of May but still managed to beat the market by 13.2 percentage points. Hedge funds were also right about betting on ITT as the stock returned 27.2% so far in Q2 (through the end of May) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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