"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Ecolab Inc. (NYSE:ECL) in order to identify whether reputable and successful top money managers continue to believe in its potential.
Ecolab Inc. (NYSE:ECL) shareholders have witnessed an increase in enthusiasm from smart money lately. ECL was in 38 hedge funds' portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with ECL positions at the end of the previous quarter. Our calculations also showed that ECL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.
[caption id="attachment_30647" align="aligncenter" width="478"] Boykin Curry of Eagle Capital[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a glance at the key hedge fund action encompassing Ecolab Inc. (NYSE:ECL).
How have hedgies been trading Ecolab Inc. (NYSE:ECL)?
At Q3's end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 41% from one quarter earlier. By comparison, 23 hedge funds held shares or bullish call options in ECL 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.
According to Insider Monkey's hedge fund database, Bill & Melinda Gates Foundation Trust, managed by Michael Larson, holds the largest position in Ecolab Inc. (NYSE:ECL). Bill & Melinda Gates Foundation Trust has a $864.7 million position in the stock, comprising 4.1% of its 13F portfolio. Sitting at the No. 2 spot is William von Mueffling of Cantillon Capital Management, with a $447.2 million position; 4.3% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions encompass Ian Simm's Impax Asset Management, Boykin Curry's Eagle Capital Management and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Empirical Capital Partners allocated the biggest weight to Ecolab Inc. (NYSE:ECL), around 9.23% of its portfolio. Cantillon Capital Management is also relatively very bullish on the stock, dishing out 4.35 percent of its 13F equity portfolio to ECL.
As one would reasonably expect, some big names were leading the bulls' herd. Luminus Management, managed by Jonathan Barrett and Paul Segal, assembled the most valuable position in Ecolab Inc. (NYSE:ECL). Luminus Management had $25.6 million invested in the company at the end of the quarter. Matthew Tewksbury's Stevens Capital Management also made a $7.8 million investment in the stock during the quarter. The other funds with brand new ECL positions are Cristan Blackman's Empirical Capital Partners, Israel Englander's Millennium Management, and Joel Greenblatt's Gotham Asset Management.
Let's also examine hedge fund activity in other stocks similar to Ecolab Inc. (NYSE:ECL). We will take a look at Boston Scientific Corporation (NYSE:BSX), Eni SpA (NYSE:E), CSX Corporation (NASDAQ:CSX), and Allergan plc (NYSE:AGN). This group of stocks' market valuations are similar to ECL's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BSX,48,2372367,-2 E,5,58328,0 CSX,38,4002726,-8 AGN,81,8207290,1 Average,43,3660178,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 43 hedge funds with bullish positions and the average amount invested in these stocks was $3660 million. That figure was $2169 million in ECL's case. Allergan plc (NYSE:AGN) is the most popular stock in this table. On the other hand Eni SpA (NYSE:E) is the least popular one with only 5 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ECL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ECL investors were disappointed as the stock returned -5.7% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.