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Here’s What Hedge Funds Think About The Cato Corporation (CATO)

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don’t make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first quarter. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards The Cato Corporation (NYSE:CATO) to find out whether it was one of their high conviction long-term ideas.

Is The Cato Corporation (NYSE:CATO) a bargain? Investors who are in the know are taking a pessimistic view. The number of bullish hedge fund bets went down by 3 lately. Our calculations also showed that cato isn’t among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

Let’s take a look at the new hedge fund action regarding The Cato Corporation (NYSE:CATO).

What have hedge funds been doing with The Cato Corporation (NYSE:CATO)?

At Q1’s end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in CATO over the last 15 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with CATO Positions

More specifically, AQR Capital Management was the largest shareholder of The Cato Corporation (NYSE:CATO), with a stake worth $9.6 million reported as of the end of March. Trailing AQR Capital Management was Arrowstreet Capital, which amassed a stake valued at $6.2 million. Renaissance Technologies, D E Shaw, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that The Cato Corporation (NYSE:CATO) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of fund managers that decided to sell off their positions entirely in the third quarter. Interestingly, David Costen Haley’s HBK Investments dropped the biggest position of all the hedgies monitored by Insider Monkey, valued at about $0.6 million in stock. Andrew Feldstein and Stephen Siderow’s fund, Blue Mountain Capital, also said goodbye to its stock, about $0.3 million worth. These transactions are important to note, as total hedge fund interest fell by 3 funds in the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as The Cato Corporation (NYSE:CATO) but similarly valued. These stocks are Kindred Biosciences Inc (NASDAQ:KIN), Unifi, Inc. (NYSE:UFI), Fiesta Restaurant Group Inc (NASDAQ:FRGI), and Motorcar Parts of America, Inc. (NASDAQ:MPAA). This group of stocks’ market valuations are similar to CATO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KIN 10 119901 4
UFI 11 69368 1
FRGI 18 94240 -2
MPAA 9 93844 -1
Average 12 94338 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $94 million. That figure was $35 million in CATO’s case. Fiesta Restaurant Group Inc (NASDAQ:FRGI) is the most popular stock in this table. On the other hand Motorcar Parts of America, Inc. (NASDAQ:MPAA) is the least popular one with only 9 bullish hedge fund positions. The Cato Corporation (NYSE:CATO) 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 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately CATO wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CATO investors were disappointed as the stock returned -15.5% 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.

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

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