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Eaton Corporation plc (ETN) vs. Hedge Fund Favorites in 2019

Debasis Saha

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57%. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 41.1% in 2019 (through December 23rd) and outperformed the broader market benchmark by 10.1 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Eaton Corporation plc (NYSE:ETN) has experienced a decrease in support from the world's most elite money managers of late. Our calculations also showed that ETN 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).

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 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. 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.

[caption id="attachment_30621" align="alignnone" width="600"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL MANAGEMENT

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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. We even check out this option genius' weekly trade ideas. 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 already gained 20 percent. Now we're going to take a look at the key hedge fund action surrounding Eaton Corporation plc (NYSE:ETN).

How are hedge funds trading Eaton Corporation plc (NYSE:ETN)?

Heading into the fourth quarter of 2019, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the second quarter of 2019. On the other hand, there were a total of 38 hedge funds with a bullish position in ETN 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.

Is ETN A Good Stock To Buy?

The largest stake in Eaton Corporation plc (NYSE:ETN) was held by AQR Capital Management, which reported holding $287.8 million worth of stock at the end of September. It was followed by D E Shaw with a $29.5 million position. Other investors bullish on the company included Gotham Asset Management, Arrowstreet Capital, and Winton Capital Management. In terms of the portfolio weights assigned to each position Prospector Partners allocated the biggest weight to Eaton Corporation plc (NYSE:ETN), around 1.13% of its 13F portfolio. Ancora Advisors is also relatively very bullish on the stock, setting aside 0.6 percent of its 13F equity portfolio to ETN.

Due to the fact that Eaton Corporation plc (NYSE:ETN) has faced a decline in interest from hedge fund managers, we can see that there were a few fund managers that decided to sell off their full holdings in the third quarter. Intriguingly, Brandon Haley's Holocene Advisors dumped the largest position of the "upper crust" of funds monitored by Insider Monkey, totaling close to $58.4 million in stock. Clint Carlson's fund, Carlson Capital, also dropped its stock, about $16.7 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 5 funds in the third quarter.

Let's check out hedge fund activity in other stocks similar to Eaton Corporation plc (NYSE:ETN). These stocks are Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), Humana Inc (NYSE:HUM), Yum! Brands, Inc. (NYSE:YUM), and Energy Transfer L.P. (NYSE:ET). This group of stocks' market values resemble ETN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BBVA,9,275548,2 HUM,61,3527353,-1 YUM,35,842106,5 ET,30,623109,1 Average,33.75,1317029,1.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $1317 million. That figure was $464 million in ETN's case. Humana Inc (NYSE:HUM) is the most popular stock in this table. On the other hand Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) is the least popular one with only 9 bullish hedge fund positions. Eaton Corporation plc (NYSE:ETN) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on ETN as the stock returned 43.4% in 2019 through December 23rd and outperformed the market by an even larger margin. 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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