Were Hedge Funds Right About Crowding Into Rockwell Automation Inc. (ROK)?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to Rockwell Automation Inc. (NYSE:ROK) changed recently.

Is Rockwell Automation Inc. (NYSE:ROK) a safe investment right now? Hedge funds were buying. The number of long hedge fund bets improved by 13 recently. Rockwell Automation Inc. (NYSE:ROK) was in 50 hedge funds’ portfolios at the end of June. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ROK 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).

Video: 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’ 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 58 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.

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. Now we’re going to review the fresh hedge fund action regarding Rockwell Automation Inc. (NYSE:ROK).

What does smart money think about Rockwell Automation Inc. (NYSE:ROK)?

At the end of June, a total of 50 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 35% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in ROK a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

The largest stake in Rockwell Automation Inc. (NYSE:ROK) was held by Impax Asset Management, which reported holding $77 million worth of stock at the end of September. It was followed by Suvretta Capital Management with a $67.1 million position. Other investors bullish on the company included Nitorum Capital, GAMCO Investors, and Markel Gayner Asset Management. In terms of the portfolio weights assigned to each position Heathbridge Capital Management allocated the biggest weight to Rockwell Automation Inc. (NYSE:ROK), around 4.27% of its 13F portfolio. Bourgeon Capital is also relatively very bullish on the stock, dishing out 2.75 percent of its 13F equity portfolio to ROK.

Consequently, key money managers have been driving this bullishness. Suvretta Capital Management, managed by Aaron Cowen, assembled the most valuable position in Rockwell Automation Inc. (NYSE:ROK). Suvretta Capital Management had $67.1 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $27.9 million position during the quarter. The following funds were also among the new ROK investors: Principal Global Investors’s Columbus Circle Investors, Andrew Sandler’s Sandler Capital Management, and Phill Gross and Robert Atchinson’s Adage Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Rockwell Automation Inc. (NYSE:ROK) but similarly valued. These stocks are Waste Connections, Inc. (NYSE:WCN), Telefonica S.A. (NYSE:TEF), Otis Worldwide Corporation (NYSE:OTIS), Fastenal Company (NASDAQ:FAST), Barclays PLC (NYSE:BCS), STMicroelectronics N.V. (NYSE:STM), and Nikola Corporation (NASDAQ:NKLA). This group of stocks’ market valuations are similar to ROK’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.3 hedge funds with bullish positions and the average amount invested in these stocks was $707 million. That figure was $547 million in ROK’s case. Otis Worldwide Corporation (NYSE:OTIS) is the most popular stock in this table. On the other hand Telefonica S.A. (NYSE:TEF) is the least popular one with only 6 bullish hedge fund positions. Rockwell Automation Inc. (NYSE:ROK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ROK is 84. 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. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on ROK, though not to the same extent, as the stock returned 14.6% since Q2 (through October 23rd) and outperformed the market as well.

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