Were Hedge Funds Right About Piling Into CME Group Inc (CME)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded CME Group Inc (NASDAQ:CME) and determine whether the smart money was really smart about this stock.

Is CME Group Inc (NASDAQ:CME) a buy right now? Money managers were buying at the end of March. The number of bullish hedge fund bets rose by 8. Our calculations also showed that CME 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.

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 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. 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.

Sander Gerber of Hudson Bay Capital

Sander Gerber of Hudson Bay Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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. With all of this in mind let’s take a peek at the latest hedge fund action encompassing CME Group Inc (NASDAQ:CME).

What does smart money think about CME Group Inc (NASDAQ:CME)?

At the end of the first quarter, a total of 62 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from the fourth quarter of 2019. By comparison, 42 hedge funds held shares or bullish call options in CME a year ago. With hedge funds’ sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is CME A Good Stock To Buy?

The largest stake in CME Group Inc (NASDAQ:CME) was held by Cantillon Capital Management, which reported holding $317.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $310.6 million position. Other investors bullish on the company included Viking Global, VGI Partners, and GuardCap Asset Management. In terms of the portfolio weights assigned to each position Stevens Capital Management allocated the biggest weight to CME Group Inc (NASDAQ:CME), around 100% of its 13F portfolio. VGI Partners is also relatively very bullish on the stock, dishing out 21.51 percent of its 13F equity portfolio to CME.

Now, key money managers were breaking ground themselves. Viking Global, managed by Andreas Halvorsen, established the most valuable position in CME Group Inc (NASDAQ:CME). Viking Global had $294.3 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $19.2 million position during the quarter. The other funds with brand new CME positions are John Overdeck and David Siegel’s Two Sigma Advisors, Greg Poole’s Echo Street Capital Management, and Ravi Chopra’s Azora Capital.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as CME Group Inc (NASDAQ:CME) but similarly valued. We will take a look at Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Dominion Energy Inc. (NYSE:D), Crown Castle International Corp. (NYSE:CCI), and Intuit Inc. (NASDAQ:INTU). This group of stocks’ market values are similar to CME’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VRTX 56 3313662 3
D 34 371177 -3
CCI 40 1640829 2
INTU 54 1557455 0
Average 46 1720781 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $1721 million. That figure was $2266 million in CME’s case. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is the most popular stock in this table. On the other hand Dominion Energy Inc. (NYSE:D) is the least popular one with only 34 bullish hedge fund positions. Compared to these stocks CME Group Inc (NASDAQ:CME) is more popular among hedge funds. 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 13.3% in 2020 through June 25th and still beat the market by 16.8 percentage points. Unfortunately CME wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CME were disappointed as the stock returned -2% during the second quarter (through June 25th) 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.