Is Honeywell International Inc. (HON) Going to Burn These Hedge Funds?

Reymerlyn Martin

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.

Honeywell International Inc. (NYSE:HON) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 56 hedge funds' portfolios at the end of the second quarter of 2019. Our calculations also showed that Honeywell isn't among the 30 most popular stocks among hedge funds (see the video below). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as International Business Machines Corp. (NYSE:IBM), Philip Morris International Inc. (NYSE:PM), and Novo Nordisk A/S (NYSE:NVO) to gather more data points. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 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 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.

Lee Ainslie MAVERICK CAPITAL

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 fresh hedge fund action encompassing Honeywell International Inc. (NYSE:HON).

How have hedgies been trading Honeywell International Inc. (NYSE:HON)?

Heading into the third quarter of 2019, a total of 56 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 49 hedge funds with a bullish position in HON a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

HON_oct2019

Of the funds tracked by Insider Monkey, D E Shaw, managed by D. E. Shaw, holds the biggest position in Honeywell International Inc. (NYSE:HON). D E Shaw has a $381.9 million position in the stock, comprising 0.5% of its 13F portfolio. The second most bullish fund manager is AQR Capital Management, managed by Cliff Asness, which holds a $371.2 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Remaining professional money managers with similar optimism contain Phill Gross and Robert Atchinson's Adage Capital Management, Mario Gabelli's GAMCO Investors and John Overdeck and David Siegel's Two Sigma Advisors.

Seeing as Honeywell International Inc. (NYSE:HON) has witnessed bearish sentiment from hedge fund managers, it's easy to see that there was a specific group of hedge funds that elected to cut their positions entirely last quarter. Intriguingly, Dmitry Balyasny's Balyasny Asset Management cut the largest stake of all the hedgies followed by Insider Monkey, valued at about $80.4 million in stock, and Bain Capital's Brookside Capital was right behind this move, as the fund dumped about $44 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Honeywell International Inc. (NYSE:HON) but similarly valued. These stocks are International Business Machines Corp. (NYSE:IBM), Philip Morris International Inc. (NYSE:PM), Novo Nordisk A/S (NYSE:NVO), and Union Pacific Corporation (NYSE:UNP). This group of stocks' market values resemble HON's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IBM,45,2040684,-1 PM,39,3794819,-4 NVO,17,2402080,-8 UNP,64,5598478,10 Average,41.25,3459015,-0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 41.25 hedge funds with bullish positions and the average amount invested in these stocks was $3459 million. That figure was $2477 million in HON's case. Union Pacific Corporation (NYSE:UNP) is the most popular stock in this table. On the other hand Novo Nordisk A/S (NYSE:NVO) is the least popular one with only 17 bullish hedge fund positions. Honeywell International Inc. (NYSE:HON) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 HON wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HON were disappointed as the stock returned -2.6% 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 this year.

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

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