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Were Hedge Funds Right About Avoiding Canon Inc. (CAJ)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Canon Inc. (NYSE:CAJ)? The smart money sentiment can provide an answer to this question.

Is Canon Inc. (NYSE:CAJ) going to take off soon? Prominent investors are in a pessimistic mood. The number of bullish hedge fund bets were cut by 1 lately. Our calculations also showed that CAJ isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

CAJ_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s check out the latest hedge fund action surrounding Canon Inc. (NYSE:CAJ).

Hedge fund activity in Canon Inc. (NYSE:CAJ)

Heading into the third quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CAJ over the last 16 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

John Overdeck of Two Sigma

More specifically, Renaissance Technologies was the largest shareholder of Canon Inc. (NYSE:CAJ), with a stake worth $68.2 million reported as of the end of March. Trailing Renaissance Technologies was D E Shaw, which amassed a stake valued at $15.4 million. Two Sigma Advisors, LMR Partners, and Weld Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Because Canon Inc. (NYSE:CAJ) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there exists a select few funds that decided to sell off their entire stakes last quarter. It’s worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the largest position of the “upper crust” of funds followed by Insider Monkey, worth an estimated $2.9 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund sold off about $1.6 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 1 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Canon Inc. (NYSE:CAJ) but similarly valued. These stocks are Square, Inc. (NYSE:SQ), Shopify Inc (NYSE:SHOP), Nutrien Ltd. (NYSE:NTR), and Xcel Energy Inc (NASDAQ:XEL). This group of stocks’ market valuations resemble CAJ’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SQ 53 2056333 3
SHOP 26 2201348 1
NTR 22 211755 -3
XEL 18 496716 2
Average 29.75 1241538 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $1242 million. That figure was $88 million in CAJ’s case. Square, Inc. (NYSE:SQ) is the most popular stock in this table. On the other hand Xcel Energy Inc (NASDAQ:XEL) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Canon Inc. (NYSE:CAJ) is even less popular than XEL. Hedge funds dodged a bullet by taking a bearish stance towards CAJ. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CAJ wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CAJ investors were disappointed as the stock returned -8.8% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.

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

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