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Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 817 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds' 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about The Cato Corporation (NYSE:CATO) in this article.
Is CATO a good stock to buy now? Hedge fund interest in The Cato Corporation (NYSE:CATO) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that CATO isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare CATO to other stocks including Trecora Resources (NYSE:TREC), Southern First Bancshares, Inc. (NASDAQ:SFST), and Hurco Companies, Inc. (NASDAQ:HURC) to get a better sense of its popularity.
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 66 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.
Gavin Saitowitz of Prelude Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now we're going to take a look at the key hedge fund action regarding The Cato Corporation (NYSE:CATO).
Do Hedge Funds Think CATO Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 16 hedge funds held shares or bullish call options in CATO 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.
More specifically, Renaissance Technologies was the largest shareholder of The Cato Corporation (NYSE:CATO), with a stake worth $7 million reported as of the end of September. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $2.7 million. AQR Capital Management, Royce & Associates, and D E Shaw were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Engineers Gate Manager allocated the biggest weight to The Cato Corporation (NYSE:CATO), around 0.01% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, earmarking 0.01 percent of its 13F equity portfolio to CATO.
Due to the fact that The Cato Corporation (NYSE:CATO) has faced declining sentiment from the entirety of the hedge funds we track, it's safe to say that there is a sect of hedgies that decided to sell off their positions entirely by the end of the third quarter. Interestingly, Michael Gelband's ExodusPoint Capital sold off the biggest position of the 750 funds watched by Insider Monkey, worth about $0.3 million in stock, and Philippe Laffont's Coatue Management was right behind this move, as the fund cut about $0.1 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as The Cato Corporation (NYSE:CATO) but similarly valued. We will take a look at Trecora Resources (NYSE:TREC), Southern First Bancshares, Inc. (NASDAQ:SFST), Hurco Companies, Inc. (NASDAQ:HURC), RCI Hospitality Holdings, Inc. (NASDAQ:RICK), CompX International Inc. (NYSE:CIX), Perion Network Ltd (NASDAQ:PERI), and Liquidia Corporation (NASDAQ:LQDA). All of these stocks' market caps are closest to CATO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TREC,6,15560,-3 SFST,6,10610,0 HURC,4,28880,0 RICK,5,33418,-2 CIX,4,12036,0 PERI,8,28654,3 LQDA,10,25209,-6 Average,6.1,22052,-1.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 6.1 hedge funds with bullish positions and the average amount invested in these stocks was $22 million. That figure was $12 million in CATO's case. Liquidia Corporation (NASDAQ:LQDA) is the most popular stock in this table. On the other hand Hurco Companies, Inc. (NASDAQ:HURC) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks The Cato Corporation (NYSE:CATO) is more popular among hedge funds. Our overall hedge fund sentiment score for CATO is 73.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 32.9% in 2020 through December 8th but still managed to beat the market by 16.2 percentage points. Hedge funds were also right about betting on CATO as the stock returned 13.4% since the end of September (through 12/8) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.