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Do Hedge Funds Love Ecolab Inc. (ECL)?

Reymerlyn Martin

World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients' money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It's not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It's also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.

Ecolab Inc. (NYSE:ECL) was in 23 hedge funds' portfolios at the end of September. ECL has experienced a decrease in hedge fund interest of late. There were 30 hedge funds in our database with ECL holdings at the end of the previous quarter. Our calculations also showed that ECL 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.

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Let's view the latest hedge fund action surrounding Ecolab Inc. (NYSE:ECL).

Hedge fund activity in Ecolab Inc. (NYSE:ECL)

Heading into the fourth quarter of 2018, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ECL over the last 13 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

ECL_dec2018

The largest stake in Ecolab Inc. (NYSE:ECL) was held by Bill & Melinda Gates Foundation Trust, which reported holding $684.6 million worth of stock at the end of September. It was followed by Eagle Capital Management with a $630.6 million position. Other investors bullish on the company included Cantillon Capital Management, Cantillon Capital Management, and Impax Asset Management.

Seeing as Ecolab Inc. (NYSE:ECL) has faced a decline in interest from hedge fund managers, it's safe to say that there is a sect of funds who sold off their positions entirely in the third quarter. At the top of the heap, Ken Griffin's Citadel Investment Group dropped the biggest position of the 700 funds followed by Insider Monkey, worth close to $40.2 million in stock. Joel Greenblatt's fund, Gotham Asset Management, also dumped its stock, about $24.3 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 7 funds in the third quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Ecolab Inc. (NYSE:ECL) but similarly valued. These stocks are Tesla Inc. (NASDAQ:TSLA), Cognizant Technology Solutions Corp (NASDAQ:CTSH), Mizuho Financial Group Inc. (NYSE:MFG), and The Southern Company (NYSE:SO). This group of stocks' market caps are closest to ECL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TSLA,31,373713,12 CTSH,42,2032175,0 MFG,3,7752,-1 SO,24,498054,10 Average,25,727924,5.25 [/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 $728 million. That figure was $2.57 billion in ECL's case. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is the most popular stock in this table. On the other hand Mizuho Financial Group Inc. (NYSE:MFG) is the least popular one with only 3 bullish hedge fund positions. Ecolab Inc. (NYSE:ECL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. In this regard CTSH might be a better candidate to consider a long position.

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

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