2019 Review: Top Hedge Fund Stocks vs. Caterpillar Inc. (CAT)

Reymerlyn Martin

Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Caterpillar Inc. (NYSE:CAT) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.

Is Caterpillar Inc. (NYSE:CAT) a splendid investment right now? Money managers are selling. The number of bullish hedge fund bets were trimmed by 8 lately. Our calculations also showed that CAT isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). CAT was in 37 hedge funds' portfolios at the end of the third quarter of 2019. There were 45 hedge funds in our database with CAT positions at the end of the previous quarter.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_340081" align="aligncenter" width="600"] Phill Gross of Adage Capital Management[/caption]

We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now let's analyze the recent hedge fund action surrounding Caterpillar Inc. (NYSE:CAT).

What does smart money think about Caterpillar Inc. (NYSE:CAT)?

Heading into the fourth quarter of 2019, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the previous quarter. On the other hand, there were a total of 63 hedge funds with a bullish position in CAT a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Michael Larson's Bill & Melinda Gates Foundation Trust has the biggest position in Caterpillar Inc. (NYSE:CAT), worth close to $1.4224 billion, comprising 6.7% of its total 13F portfolio. On Bill & Melinda Gates Foundation Trust's heels is Ken Fisher of Fisher Asset Management, with a $679.1 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Remaining members of the smart money that are bullish contain David E. Shaw's D E Shaw, Cliff Asness's AQR Capital Management and Phill Gross and Robert Atchinson's Adage Capital Management. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Caterpillar Inc. (NYSE:CAT), around 6.7% of its 13F portfolio. Levin Capital Strategies is also relatively very bullish on the stock, dishing out 1.46 percent of its 13F equity portfolio to CAT.

Judging by the fact that Caterpillar Inc. (NYSE:CAT) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of hedge funds that elected to cut their entire stakes last quarter. At the top of the heap, Andrew Sandler's Sandler Capital Management sold off the largest stake of the 750 funds watched by Insider Monkey, totaling about $40.9 million in call options. Alexander Mitchell's fund, Scopus Asset Management, also dropped its call options, about $27.3 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 8 funds last quarter.

Let's now review hedge fund activity in other stocks similar to Caterpillar Inc. (NYSE:CAT). These stocks are Enbridge Inc (NYSE:ENB), Morgan Stanley (NYSE:MS), Fiserv, Inc. (NASDAQ:FISV), and Celgene Corporation (NASDAQ:CELG). This group of stocks' market valuations resemble CAT's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENB,18,515524,-2 MS,61,4162955,1 FISV,73,3874672,25 CELG,93,12535017,5 Average,61.25,5272042,7.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 61.25 hedge funds with bullish positions and the average amount invested in these stocks was $5272 million. That figure was $2758 million in CAT's case. Celgene Corporation (NASDAQ:CELG) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 18 bullish hedge fund positions. Caterpillar Inc. (NYSE:CAT) 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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CAT wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); CAT investors were disappointed as the stock returned 20.2% in 2019 (as of 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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