"Market conditions are changing. The continued rise in interest rates suggests we are in the early stages of a bond bear market, which could intensify as central banks withdraw liquidity. The receding tide of liquidity will start to reveal more rocks beyond what has been exposed in emerging markets so far, and the value of a value discipline will be in avoiding the biggest capital-destroying rocks. If a rock emerges on the crowded shore of U.S. momentum, it could result in a major liquidity challenge, as momentum is often most intense on the downside as a crowded trade reverses. So investors are facing a large potential trade-off right now: continue to bet on the current dominance of momentum and the S&P 500, or bet on change and take an active value bet in names with attractive value and optionality, but with negative momentum," said Clearbridge Investments in its market commentary. We aren't sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Cummins Inc. (NYSE:CMI).
Cummins Inc. (NYSE:CMI) was in 32 hedge funds' portfolios at the end of September. CMI investors should be aware of an increase in hedge fund sentiment of late. There were 28 hedge funds in our database with CMI holdings at the end of the previous quarter. Our calculations also showed that CMI isn't among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let's take a gander at the key hedge fund action encompassing Cummins Inc. (NYSE:CMI).
How have hedgies been trading Cummins Inc. (NYSE:CMI)?
At Q3's end, a total of 32 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 14% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards CMI over the last 13 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Cliff Asness's AQR Capital Management has the number one position in Cummins Inc. (NYSE:CMI), worth close to $238.8 million, comprising 0.2% of its total 13F portfolio. Coming in second is John Overdeck and David Siegel of Two Sigma Advisors, with a $182.8 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Some other peers that hold long positions comprise Israel Englander's Millennium Management, Phill Gross and Robert Atchinson's Adage Capital Management and Jeffrey Talpins's Element Capital Management.
As one would reasonably expect, specific money managers were breaking ground themselves. Interval Partners, managed by Gregg Moskowitz, established the most outsized position in Cummins Inc. (NYSE:CMI). Interval Partners had $11.2 million invested in the company at the end of the quarter. Ian Simm's Impax Asset Management also made a $10.1 million investment in the stock during the quarter. The other funds with brand new CMI positions are Alexander Mitchell's Scopus Asset Management, Steve Cohen's Point72 Asset Management, and Anand Parekh's Alyeska Investment Group.
Let's also examine hedge fund activity in other stocks similar to Cummins Inc. (NYSE:CMI). We will take a look at Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK), PG&E Corporation (NYSE:PCG), Consolidated Edison, Inc. (NYSE:ED), and M&T Bank Corporation (NYSE:MTB). All of these stocks' market caps match CMI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TLK,4,97709,-1 PCG,60,4736112,-1 ED,11,1004030,-3 MTB,41,2338443,2 Average,29,2044074,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $2.04 billion. That figure was $634 million in CMI's case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK) is the least popular one with only 4 bullish hedge fund positions. Cummins Inc. (NYSE:CMI) 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. In this regard PCG might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.