Were Hedge Funds Right About Ditching Honeywell International Inc. (HON)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Honeywell International Inc. (NYSE:HON) and determine whether hedge funds skillfully traded this stock.

Is Honeywell International Inc. (NYSE:HON) the right investment to pursue these days? Investors who are in the know were in a pessimistic mood. The number of long hedge fund positions were trimmed by 11 recently. Our calculations also showed that HON 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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 take a look at the fresh hedge fund action encompassing Honeywell International Inc. (NYSE:HON).

How are hedge funds trading Honeywell International Inc. (NYSE:HON)?

At Q1’s end, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HON over the last 18 quarters. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

The largest stake in Honeywell International Inc. (NYSE:HON) was held by D E Shaw, which reported holding $259.3 million worth of stock at the end of September. It was followed by Adage Capital Management with a $193.9 million position. Other investors bullish on the company included Diamond Hill Capital, Two Sigma Advisors, and GAMCO Investors. In terms of the portfolio weights assigned to each position Pittencrieff Partners – Gabalex Capital allocated the biggest weight to Honeywell International Inc. (NYSE:HON), around 11.52% of its 13F portfolio. Bourgeon Capital is also relatively very bullish on the stock, designating 3.52 percent of its 13F equity portfolio to HON.

Seeing as Honeywell International Inc. (NYSE:HON) has faced declining sentiment from the smart money, it’s easy to see that there were a few hedgies that decided to sell off their full holdings last quarter. Interestingly, Brandon Haley’s Holocene Advisors sold off the biggest position of the “upper crust” of funds watched by Insider Monkey, totaling close to $106.8 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund said goodbye to about $99.8 million worth. These transactions are interesting, as total hedge fund interest fell by 11 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Honeywell International Inc. (NYSE:HON). These stocks are Gilead Sciences, Inc. (NASDAQ:GILD), Texas Instruments Incorporated (NASDAQ:TXN), BHP Group (NYSE:BHP), and Linde plc (NYSE:LIN). This group of stocks’ market values are closest to HON’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GILD 76 2832662 9
TXN 46 1744576 -4
BHP 18 460616 -2
LIN 53 3350656 6
Average 48.25 2097128 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.25 hedge funds with bullish positions and the average amount invested in these stocks was $2097 million. That figure was $1215 million in HON’s case. Gilead Sciences, Inc. (NASDAQ:GILD) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 18 bullish hedge fund positions. Honeywell International Inc. (NYSE:HON) is not the least popular stock in this group but hedge fund interest is still below average. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately HON wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HON investors were disappointed as the stock returned 8.9% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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