Oakmark Funds, an investment management firm, published its “Oakmark Fund” second quarter 2021 investor letter – a copy of which can be seen here. A return of 8.9% was reported by the fund in the Q2 of 2021, outperforming its benchmark by 25 percentage points. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Oakmark Funds, the fund mentioned Caterpillar Inc. (NYSE: CAT) and discussed its stance on the firm. Caterpillar Inc. is a Deerfield, Illinois-based construction machinery and equipment company with a $115.6 billion market capitalization. CAT delivered a 16.05% return since the beginning of the year, extending its 12-month returns to 47.07%. The stock closed at $214.76 per share on August 26, 2021.
Here is what Oakmark Funds has to say about Caterpillar Inc. in its Q2 2021 investor letter:
“Having followed the company closely for north of a decade, Caterpillar is a name we know well. For much of its history, the operating efficiency of the company left much to be desired, but its underlying competitive position was rarely in doubt. A series of actions over the past decade (e.g., LEAN implementation, improved service mix, optimized manufacturing footprint) helped to narrow the gap between Caterpillar’s potential and its realized results, driving material margin expansion and strong share price performance. In our view, the company remains among the highest quality industrials in the market, but its underlying business is cyclical, which can translate to large swings in both performance and investor sentiment over short time periods. Our ability to focus on the long-term, sustainable earnings power of a business (rather than getting distracted by near-term fluctuations) is our most significant edge when investing in cyclical businesses. Due to the inherent volatility in Caterpillar’s end markets and operating performance, we suspect we’ll have a future opportunity to own this high-quality business at a more attractive price once the cycle turns and today’s enthusiasm wears off.”
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Based on our calculations, Caterpillar Inc. (NYSE: CAT) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. CAT was in 62 hedge fund portfolios at the end of the first half of 2021, compared to 53 funds in the previous quarter. Caterpillar Inc. (NYSE: CAT) delivered a -11.59% return in the past 3 months.
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 115 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.
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Disclosure: None. This article is originally published at Insider Monkey.
