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Were Hedge Funds Right About Dropping Emerson Electric Co. (EMR)?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the second quarter and hedging or reducing many of their long positions. Some fund managers like this one are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Emerson Electric Co. (NYSE:EMR).

Emerson Electric Co. (NYSE:EMR) has seen a decrease in support from the world’s most elite money managers of late. EMR was in 32 hedge funds’ portfolios at the end of the second quarter of 2019. There were 44 hedge funds in our database with EMR positions at the end of the previous quarter. Our calculations also showed that EMR 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.

EMR_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 go over the key hedge fund action surrounding Emerson Electric Co. (NYSE:EMR).

What have hedge funds been doing with Emerson Electric Co. (NYSE:EMR)?

Heading into the third quarter of 2019, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of -27% from the previous quarter. By comparison, 30 hedge funds held shares or bullish call options in EMR a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

TUDOR INVESTMENT CORP

The largest stake in Emerson Electric Co. (NYSE:EMR) was held by Adage Capital Management, which reported holding $118.5 million worth of stock at the end of March. It was followed by AQR Capital Management with a $105.7 million position. Other investors bullish on the company included Two Sigma Advisors, Senator Investment Group, and Millennium Management.

Because Emerson Electric Co. (NYSE:EMR) has faced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few hedge funds that slashed their positions entirely by the end of the second quarter. Interestingly, Anand Parekh’s Alyeska Investment Group dropped the biggest stake of the 750 funds followed by Insider Monkey, totaling close to $88.8 million in stock. Alexander Mitchell’s fund, Scopus Asset Management, also cut its stock, about $34.2 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 12 funds by the end of the second quarter.

Let’s check out hedge fund activity in other stocks similar to Emerson Electric Co. (NYSE:EMR). These stocks are China Telecom Corporation Limited (NYSE:CHA), ICICI Bank Limited (NYSE:IBN), Fidelity National Information Services Inc. (NYSE:FIS), and Ford Motor Company (NYSE:F). This group of stocks’ market valuations match EMR’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHA 7 23306 -1
IBN 29 912531 3
FIS 59 4783095 4
F 39 1594561 6
Average 33.5 1828373 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.5 hedge funds with bullish positions and the average amount invested in these stocks was $1828 million. That figure was $638 million in EMR’s case. Fidelity National Information Services Inc. (NYSE:FIS) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 7 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. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately EMR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); EMR investors were disappointed as the stock returned 1.1% 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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