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Hedge Funds Are Selling Eaton Corporation plc (ETN)

Debasis Saha

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of Eaton Corporation plc (NYSE:ETN).

Eaton Corporation plc (NYSE:ETN) has experienced a decrease in activity from the world's largest hedge funds of late. ETN was in 35 hedge funds' portfolios at the end of the first quarter of 2020. There were 42 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 Q1 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.

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 S&P 500 ETFs by 51 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.

[caption id="attachment_30621" align="aligncenter" width="400"] Cliff Asness of AQR Capital Management[/caption]

AQR CAPITAL MANAGEMENT

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020's unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's take a look at the new hedge fund action encompassing Eaton Corporation plc (NYSE:ETN).

Hedge fund activity in Eaton Corporation plc (NYSE:ETN)

At Q1's end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 39 hedge funds with a bullish position in ETN a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ETN A Good Stock To Buy?

More specifically, Citadel Investment Group was the largest shareholder of Eaton Corporation plc (NYSE:ETN), with a stake worth $169.3 million reported as of the end of September. Trailing Citadel Investment Group was AQR Capital Management, which amassed a stake valued at $158.9 million. Holocene Advisors, Lansdowne Partners, and Arrowstreet Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Lansdowne Partners allocated the biggest weight to Eaton Corporation plc (NYSE:ETN), around 4.71% of its 13F portfolio. Bronson Point Partners is also relatively very bullish on the stock, designating 3.72 percent of its 13F equity portfolio to ETN.

Due to the fact that Eaton Corporation plc (NYSE:ETN) has faced a decline in interest from hedge fund managers, it's easy to see that there were a few hedgies that decided to sell off their full holdings heading into Q4. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management dropped the largest position of the 750 funds monitored by Insider Monkey, comprising close to $104.9 million in stock. Richard SchimeláandáLawrence Sapanski's fund, Cinctive Capital Management, also dropped its stock, about $17.2 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 7 funds heading into Q4.

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 FedEx Corporation (NYSE:FDX), Xcel Energy Inc (NYSE:XEL), Kinder Morgan Inc (NYSE:KMI), and TAL Education Group, Inc. (NYSE:TAL). 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 FDX,50,1092300,5 XEL,24,394426,9 KMI,47,947312,7 TAL,38,1801280,8 Average,39.75,1058830,7.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.75 hedge funds with bullish positions and the average amount invested in these stocks was $1059 million. That figure was $824 million in ETN's case. FedEx Corporation (NYSE:FDX) is the most popular stock in this table. On the other hand Xcel Energy Inc (NYSE:XEL) is the least popular one with only 24 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. 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 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 8.3% in 2020 through the end of May and surpassed the market by 13.2 percentage points. Unfortunately ETN wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ETN investors were disappointed as the stock returned 10.3% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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