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Did Hedge Funds Drop The Ball On The Timken Company (TKR) ?

Reymerlyn Martin

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The fourth quarter of 2018 is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of The Timken Company (NYSE:TKR).

The Timken Company (NYSE:TKR) was in 25 hedge funds' portfolios at the end of the fourth quarter of 2018. TKR has seen a decrease in support from the world's most elite money managers recently. There were 29 hedge funds in our database with TKR holdings at the end of the previous quarter. Our calculations also showed that TKR isn't among the 30 most popular stocks among hedge funds.

In the 21st century investor’s toolkit there are a large number of gauges stock traders use to assess their holdings. Some of the most under-the-radar gauges are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the top picks of the elite fund managers can trounce the S&P 500 by a very impressive amount (see the details here).

CHILTON INVESTMENT COMPANY

Let's take a look at the key hedge fund action regarding The Timken Company (NYSE:TKR).

How are hedge funds trading The Timken Company (NYSE:TKR)?

Heading into the first quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TKR over the last 14 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

TKR_apr2019

More specifically, Adage Capital Management was the largest shareholder of The Timken Company (NYSE:TKR), with a stake worth $38.5 million reported as of the end of September. Trailing Adage Capital Management was D E Shaw, which amassed a stake valued at $26.6 million. Millennium Management, AQR Capital Management, and Carlson Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as The Timken Company (NYSE:TKR) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there was a specific group of hedgies who sold off their positions entirely last quarter. It's worth mentioning that Gregg Moskowitz's Interval Partners sold off the biggest position of all the hedgies followed by Insider Monkey, valued at an estimated $5.7 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund said goodbye to about $4.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 4 funds last quarter.

Let's check out hedge fund activity in other stocks similar to The Timken Company (NYSE:TKR). These stocks are Tetra Tech, Inc. (NASDAQ:TTEK), Eagle Materials, Inc. (NYSE:EXP), Mercury General Corporation (NYSE:MCY), and ASGN Incorporated (NYSE:ASGN). This group of stocks' market caps are similar to TKR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TTEK,25,71080,8 EXP,25,520317,-7 MCY,18,153498,0 ASGN,21,123517,3 Average,22.25,217103,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $217 million. That figure was $178 million in TKR's case. Tetra Tech, Inc. (NASDAQ:TTEK) is the most popular stock in this table. On the other hand Mercury General Corporation (NYSE:MCY) is the least popular one with only 18 bullish hedge fund positions. The Timken Company (NYSE:TKR) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on TKR as the stock returned 29.1% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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