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Cummins Inc. (CMI): Hedge Funds Cashed Out Too Early

Abigail Fisher

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 37.4% in 2019 (through the end of November) and outperformed the S&P 500 ETF by 9.9 percentage points. We are done processing the latest 13F filings and in this article we will study how hedge fund sentiment towards Cummins Inc. (NYSE:CMI) changed during the first quarter.

Is Cummins Inc. (NYSE:CMI) worth your attention right now? The best stock pickers are reducing their bets on the stock. The number of bullish hedge fund positions decreased by 14 lately. Our calculations also showed that CMI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

To the average investor there are plenty of signals market participants have at their disposal to assess their holdings. A pair of the most innovative signals are hedge fund and insider trading sentiment. Our researchers have shown that, historically, those who follow the best picks of the top hedge fund managers can outpace the broader indices by a solid margin (see the details here).

[caption id="attachment_26397" align="aligncenter" width="473"] Ray Dalio of Bridgewater Associates[/caption]

BRIDGEWATER ASSOCIATES

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to go over the latest hedge fund action regarding Cummins Inc. (NYSE:CMI).

How have hedgies been trading Cummins Inc. (NYSE:CMI)?

At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -31% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CMI over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

CMI_dec2019

More specifically, AQR Capital Management was the largest shareholder of Cummins Inc. (NYSE:CMI), with a stake worth $404.8 million reported as of the end of September. Trailing AQR Capital Management was Holocene Advisors, which amassed a stake valued at $186.7 million. Citadel Investment Group, Two Sigma Advisors, and Arrowstreet Capital 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 Holocene Advisors allocated the biggest weight to Cummins Inc. (NYSE:CMI), around 1.92% of its portfolio. Centenus Global Management is also relatively very bullish on the stock, dishing out 0.69 percent of its 13F equity portfolio to CMI.

Due to the fact that Cummins Inc. (NYSE:CMI) has experienced falling interest from the aggregate hedge fund industry, it's safe to say that there was a specific group of money managers that slashed their positions entirely last quarter. At the top of the heap, Jim Simons's Renaissance Technologies sold off the biggest position of all the hedgies followed by Insider Monkey, totaling about $20.4 million in stock. Anand Parekh's fund, Alyeska Investment Group, also dumped its stock, about $20.2 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 14 funds last quarter.

Let's also examine hedge fund activity in other stocks similar to Cummins Inc. (NYSE:CMI). We will take a look at Coca-Cola European Partners plc (NYSE:CCEP), TD Ameritrade Holding Corp. (NASDAQ:AMTD), Fiat Chrysler Automobiles NV (NYSE:FCAU), and KLA Corporation (NASDAQ:KLAC). This group of stocks' market values are closest to CMI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CCEP,16,125523,6 AMTD,29,334275,7 FCAU,27,1493339,-1 KLAC,28,784370,4 Average,25,684377,4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $684 million. That figure was $857 million in CMI's case. TD Ameritrade Holding Corp. (NASDAQ:AMTD) is the most popular stock in this table. On the other hand Coca-Cola European Partners plc (NYSE:CCEP) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Cummins Inc. (NYSE:CMI) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on CMI as the stock returned 13.2% during the first two months of Q4 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.

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

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