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The Cato Corporation (CATO): Are Hedge Funds Right About This Stock?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtThe Cato Corporation (NYSE:CATO) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

The Cato Corporation (NYSE:CATO) has seen a decrease in activity from the world’s largest hedge funds of late. CATO was in 10 hedge funds’ portfolios at the end of the first quarter of 2020. There were 15 hedge funds in our database with CATO positions at the end of the previous quarter. Our calculations also showed that CATO 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.

In the 21st century investor’s toolkit there are tons of indicators stock market investors can use to grade publicly traded companies. A duo of the most useful indicators are hedge fund and insider trading indicators. We have shown that, historically, those who follow the best picks of the elite money managers can outpace the broader indices by a superb amount (see the details here).

Chuck Royce

Chuck Royce of Royce & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s go over the new hedge fund action encompassing The Cato Corporation (NYSE:CATO).

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

At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -33% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CATO over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in The Cato Corporation (NYSE:CATO) was held by Renaissance Technologies, which reported holding $6.5 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $3.6 million position. Other investors bullish on the company included AQR Capital Management, D E Shaw, and Royce & Associates. In terms of the portfolio weights assigned to each position Winton Capital Management allocated the biggest weight to The Cato Corporation (NYSE:CATO), around 0.03% of its 13F portfolio. Tudor Investment Corp is also relatively very bullish on the stock, dishing out 0.02 percent of its 13F equity portfolio to CATO.

Since The Cato Corporation (NYSE:CATO) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there was a specific group of hedgies that elected to cut their positions entirely heading into Q4. It’s worth mentioning that Noam Gottesman’s GLG Partners said goodbye to the largest position of the “upper crust” of funds watched by Insider Monkey, valued at about $0.4 million in stock, and Donald Sussman’s Paloma Partners was right behind this move, as the fund sold off about $0.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 5 funds heading into Q4.

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 Nexgen Energy Ltd. (NYSE:NXE), Guaranty Bancshares, Inc. (NASDAQ:GNTY), Rigel Pharmaceuticals, Inc. (NASDAQ:RIGL), and Concert Pharmaceuticals Inc (NASDAQ:CNCE). This group of stocks’ market valuations match CATO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NXE 5 9155 -1
GNTY 2 2887 -1
RIGL 14 61151 -3
CNCE 12 67635 0
Average 8.25 35207 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $35 million. That figure was $19 million in CATO’s case. Rigel Pharmaceuticals, Inc. (NASDAQ:RIGL) is the most popular stock in this table. On the other hand Guaranty Bancshares, Inc. (NASDAQ:GNTY) is the least popular one with only 2 bullish hedge fund positions. The Cato Corporation (NYSE:CATO) 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately CATO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CATO were disappointed as the stock returned -23.3% 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.