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Hedge Funds Have Never Been This Bullish On Eaton Corporation plc (ETN)

Reymerlyn Martin

Will the new coronavirus cause a recession in US in the next 6 months? On February 27th, we put the probability at 75% and we predicted that the market will decline by at least 20% in this article and told you to short market ETFs and buy Treasury bonds. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Eaton Corporation plc (NYSE:ETN).

Eaton Corporation plc (NYSE:ETN) was in 42 hedge funds' portfolios at the end of December. ETN investors should pay attention to an increase in hedge fund interest in recent months. There were 34 hedge funds in our database with ETN positions at the end of the previous quarter. Our calculations also showed that ETN isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 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 S&P 500 ETFs by more than 41 percentage points since March 2017 (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_673876" align="aligncenter" width="400"] John Overdeck of Two Sigma Advisors[/caption]

John Overdeck of Two Sigma

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind let's review the key hedge fund action encompassing Eaton Corporation plc (NYSE:ETN).

What have hedge funds been doing with Eaton Corporation plc (NYSE:ETN)?

At Q4's end, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ETN over the last 18 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Ken Griffin's Citadel Investment Group has the most valuable position in Eaton Corporation plc (NYSE:ETN), worth close to $439.3 million, amounting to 0.2% of its total 13F portfolio. The second most bullish fund manager is AQR Capital Management, led by Cliff Asness, holding a $316.6 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Other peers that are bullish encompass Dmitry Balyasny's Balyasny Asset Management, Alex Snow's Lansdowne Partners and John Overdeck and David Siegel's Two Sigma Advisors. In terms of the portfolio weights assigned to each position Cinctive Capital Management allocated the biggest weight to Eaton Corporation plc (NYSE:ETN), around 1.8% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, dishing out 1.54 percent of its 13F equity portfolio to ETN.

As one would reasonably expect, specific money managers have jumped into Eaton Corporation plc (NYSE:ETN) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, created the largest position in Eaton Corporation plc (NYSE:ETN). Balyasny Asset Management had $104.9 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson's Adage Capital Management also initiated a $45 million position during the quarter. The other funds with brand new ETN positions are Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management, Clint Carlson's Carlson Capital, and Sara Nainzadeh's Centenus Global Management.

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. These stocks are Marathon Petroleum Corp (NYSE:MPC), Royal Bank of Scotland Group plc (NYSE:RBS), AFLAC Incorporated (NYSE:AFL), and Orange S.A. (NYSE:ORAN). This group of stocks' market values match ETN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MPC,69,2759103,1 RBS,5,37114,0 AFL,32,511962,1 ORAN,2,606,-2 Average,27,827196,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $827 million. That figure was $1224 million in ETN's case. Marathon Petroleum Corp (NYSE:MPC) is the most popular stock in this table. On the other hand Orange S.A. (NYSE:ORAN) is the least popular one with only 2 bullish hedge fund positions. Eaton Corporation plc (NYSE:ETN) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but still beat the market by 1.9 percentage points. Hedge funds were also right about betting on ETN as the stock returned -12.2% during the first quarter (through March 9th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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