The market has been volatile in the last few months as the Federal Reserve continued its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q2 and the beginning of Q3. In this article, we analyze what the smart money thinks of Cincinnati Financial Corporation (NASDAQ:CINF) and find out how it is affected by hedge funds' moves.
Cincinnati Financial Corporation (NASDAQ:CINF) was in 18 hedge funds' portfolios at the end of the second quarter of 2019. CINF investors should be aware of a decrease in enthusiasm from smart money in recent months. There were 21 hedge funds in our database with CINF holdings at the end of the previous quarter. Our calculations also showed that CINF isn't among the 30 most popular stocks among hedge funds (see the video below). 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the key hedge fund action regarding Cincinnati Financial Corporation (NASDAQ:CINF).
Hedge fund activity in Cincinnati Financial Corporation (NASDAQ:CINF)
At Q2's end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CINF over the last 16 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Cincinnati Financial Corporation (NASDAQ:CINF) was held by Select Equity Group, which reported holding $440.3 million worth of stock at the end of March. It was followed by Renaissance Technologies with a $20.6 million position. Other investors bullish on the company included D E Shaw, Winton Capital Management, and Citadel Investment Group.
Seeing as Cincinnati Financial Corporation (NASDAQ:CINF) has experienced falling interest from the aggregate hedge fund industry, it's easy to see that there is a sect of fund managers that slashed their positions entirely heading into Q3. At the top of the heap, Dmitry Balyasny's Balyasny Asset Management cut the biggest stake of the "upper crust" of funds followed by Insider Monkey, totaling about $2 million in stock. George Zweig, Shane Haas and Ravi Chander's fund, Signition LP, also dumped its stock, about $0.5 million worth. These transactions are important to note, as total hedge fund interest fell by 3 funds heading into Q3.
Let's now take a look at hedge fund activity in other stocks similar to Cincinnati Financial Corporation (NASDAQ:CINF). These stocks are Diamondback Energy Inc (NASDAQ:FANG), Copart, Inc. (NASDAQ:CPRT), Fortis Inc. (NYSE:FTS), and The Kroger Co. (NYSE:KR). This group of stocks' market caps match CINF's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FANG,47,1531990,0 CPRT,30,252281,6 FTS,12,256125,-1 KR,28,404426,6 Average,29.25,611206,2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $611 million. That figure was $567 million in CINF's case. Diamondback Energy Inc (NASDAQ:FANG) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 12 bullish hedge fund positions. Cincinnati Financial Corporation (NASDAQ:CINF) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on CINF as the stock returned 13.1% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.