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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Eaton Corporation plc (NYSE:ETN) and determine whether hedge funds had an edge regarding this stock.
Eaton Corporation plc (NYSE:ETN) investors should be aware of a decrease in activity from the world's largest hedge funds of late. Eaton Corporation plc (NYSE:ETN) was in 34 hedge funds' portfolios at the end of June. The all time high for this statistics is 42. Our calculations also showed that ETN isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Today there are dozens of methods stock market investors can use to value stocks. Some of the most under-the-radar methods are hedge fund and insider trading interest. Our experts have shown that, historically, those who follow the top picks of the top fund managers can outperform the market by a healthy amount (see the details here).
Ray Dalio of Bridgewater Associates
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. Now let's take a gander at the latest hedge fund action surrounding Eaton Corporation plc (NYSE:ETN).
How are hedge funds trading Eaton Corporation plc (NYSE:ETN)?
Heading into the third quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from one quarter earlier. On the other hand, there were a total of 36 hedge funds with a bullish position in ETN a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Eaton Corporation plc (NYSE:ETN) was held by AQR Capital Management, which reported holding $116.8 million worth of stock at the end of September. It was followed by Levin Easterly Partners with a $96.3 million position. Other investors bullish on the company included Citadel Investment Group, Lansdowne Partners, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Levin Easterly Partners allocated the biggest weight to Eaton Corporation plc (NYSE:ETN), around 4.37% of its 13F portfolio. Bronson Point Partners is also relatively very bullish on the stock, dishing out 2.65 percent of its 13F equity portfolio to ETN.
Because Eaton Corporation plc (NYSE:ETN) has witnessed bearish sentiment from hedge fund managers, we can see that there is a sect of hedge funds who were dropping their entire stakes in the second quarter. Intriguingly, Phill Gross and Robert Atchinson's Adage Capital Management dropped the biggest stake of the "upper crust" of funds watched by Insider Monkey, comprising close to $64.9 million in stock, and Clint Carlson's Carlson Capital was right behind this move, as the fund dropped about $25.5 million worth. These transactions are interesting, as total hedge fund interest was cut by 1 funds in the second quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Eaton Corporation plc (NYSE:ETN) but similarly valued. We will take a look at Las Vegas Sands Corp. (NYSE:LVS), Canadian Pacific Railway Limited (NYSE:CP), Eni SpA (NYSE:E), Kinder Morgan Inc (NYSE:KMI), Sempra Energy (NYSE:SRE), Snap Inc. (NYSE:SNAP), and The Bank of New York Mellon Corporation (NYSE:BK). This group of stocks' market valuations match ETN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LVS,47,2396746,5 CP,36,1635509,4 E,8,43125,3 KMI,50,1090828,3 SRE,35,635290,8 SNAP,49,1601957,1 BK,48,4431288,-4 Average,39,1690678,2.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $1691 million. That figure was $560 million in ETN's case. Kinder Morgan Inc (NYSE:KMI) is the most popular stock in this table. On the other hand Eni SpA (NYSE:E) is the least popular one with only 8 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 overall hedge fund sentiment score for ETN is 59.2. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and beat the market by 23.2 percentage points. A small number of hedge funds were also right about betting on ETN, though not to the same extent, as the stock returned 17.5% during the first two months of Q3 and outperformed the market.
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Disclosure: None. This article was originally published at Insider Monkey.