Was The Smart Money Right About Avoiding Emerson Electric Co. (EMR)?

In this article we will check out the progression of hedge fund sentiment towards Emerson Electric Co. (NYSE:EMR) 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.

Is Emerson Electric Co. (NYSE:EMR) ready to rally soon? The smart money was getting more optimistic. The number of long hedge fund positions improved by 3 in recent months. Emerson Electric Co. (NYSE:EMR) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. Our calculations also showed that EMR isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 33 hedge funds in our database with EMR positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to go over the key hedge fund action surrounding Emerson Electric Co. (NYSE:EMR).

How are hedge funds trading Emerson Electric Co. (NYSE:EMR)?

At the end of June, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the first quarter of 2020. By comparison, 32 hedge funds held shares or bullish call options in EMR a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, David Tepper’s Appaloosa Management LP has the number one position in Emerson Electric Co. (NYSE:EMR), worth close to $86.8 million, accounting for 1.5% of its total 13F portfolio. On Appaloosa Management LP’s heels is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $82.1 million position; 0.2% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions comprise D. E. Shaw’s D E Shaw, Cliff Asness’s AQR Capital Management and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Galibier Capital Management allocated the biggest weight to Emerson Electric Co. (NYSE:EMR), around 4.63% of its 13F portfolio. Appian Way Asset Management is also relatively very bullish on the stock, dishing out 4.47 percent of its 13F equity portfolio to EMR.

Consequently, key hedge funds have been driving this bullishness. Appaloosa Management LP, managed by David Tepper, initiated the biggest position in Emerson Electric Co. (NYSE:EMR). Appaloosa Management LP had $86.8 million invested in the company at the end of the quarter. Andrew Byington’s Appian Way Asset Management also initiated a $7.7 million position during the quarter. The other funds with new positions in the stock are Louis Bacon’s Moore Global Investments, Louis Navellier’s Navellier & Associates, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s check out hedge fund activity in other stocks similar to Emerson Electric Co. (NYSE:EMR). These stocks are eBay Inc (NASDAQ:EBAY), Centene Corporation (NYSE:CNC), FedEx Corporation (NYSE:FDX), L3Harris Technologies, Inc. (NYSE:LHX), Monster Beverage Corp (NASDAQ:MNST), General Motors Company (NYSE:GM), and Exelon Corporation (NASDAQ:EXC). This group of stocks’ market valuations are closest to EMR’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.3 hedge funds with bullish positions and the average amount invested in these stocks was $2528 million. That figure was $422 million in EMR’s case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand Exelon Corporation (NASDAQ:EXC) is the least popular one with only 30 bullish hedge fund positions. Emerson Electric Co. (NYSE:EMR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for EMR is 39.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately EMR wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); EMR investors were disappointed as the stock returned 5.2% since the end of June (through 10/30) 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 most of these stocks already outperformed the market in 2020.

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