United Technologies Corporation (NYSE:UTX)‘s shares declined by just over 7% in trading today, despite the company reporting earnings for its second quarter that beat Wall Street’s estimates. That’s because the beat was accompanied by a not-so-investor-friendly slashing of the company’s full-year outlook for the current fiscal year. The building systems and aerospace company reported earnings of $1.73 per share, down by 6% year-over-year, on revenues of $16.30 billion, down by 5% from the same quarter last year. Wall Street was expecting earnings of $1.72 per share on revenues of $16.54 billion. United Technologies Corporation (NYSE:UTX) said that excluding the Sikorsky helicopter division which it is selling to Lockheed Martin Corporation (NYSE:LMT) for $9 billion, it is expecting full-year-earnings of $6.15 to $6.30 per share, down from the $6.35 to $6.55 per share it previously forecast. On June 15, the firm also cut its guidance for the full year. UTX reported a 10% decline in Otis orders and a 15% decline in UTC Climate, Controls & Security orders from China in the second quarter. The firm also said it is dealing with currency exchange impact and weaker-than-expected sales in several industries.
Hedge funds appeared to anticipate the looming difficulties for the firm in the first quarter, as they were collectively less eager about United Technologies Corporation (NYSE:UTX). By the end of March, a total of 60 of the hedge funds tracked by Insider Monkey were long in this stock, unchanged from the fourth quarter. The total value of holdings of those hedge funds which still had long positions in United Technologies by the end of the first quarter declined by 12.53% however, compared to the end of the fourth quarter of 2014, to $3.21 billion. This is despite the stock climbing by 1.91% in the first quarter. The smart money was right to pull their money out, as the stock fell by 5.35% in the second quarter even before the latest setback.
First, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 139% since the launch of our small-cap strategy compared to less than 59% for the S&P 500 (see the details).
Furthermore, Insider Monkey tracks insider buying or selling of shares. This tells us whether insiders are also bullish on their firms’ shares. United Technologies’ insiders did not purchase any shares this year, through July 20. The most recent sales were by President David Gitlin, who sold 2,792 shares on May 15, and by Director Christine Todd Whitman, who sold 3,800 shares on March 16.
Keeping this in mind, let’s take a glance at the new hedge fund activity surrounding United Technologies Corporation.