U.S. Markets closed

Here’s What Hedge Funds Think About ITT Inc. (ITT)

Nina Todic

Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

ITT Inc. (NYSE:ITT) investors should pay attention to a decrease in enthusiasm from smart money in recent months. ITT was in 20 hedge funds' portfolios at the end of the third quarter of 2019. There were 25 hedge funds in our database with ITT holdings at the end of the previous quarter. Our calculations also showed that ITT 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.

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 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. 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_255014" align="aligncenter" width="450"] Clint Carlson of Carlson 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. Let's take a peek at the latest hedge fund action surrounding ITT Inc. (NYSE:ITT).

How are hedge funds trading ITT Inc. (NYSE:ITT)?

Heading into the fourth quarter of 2019, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in ITT a year ago. With the smart money's capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Adage Capital Management, managed by Phill Gross and Robert Atchinson, holds the biggest position in ITT Inc. (NYSE:ITT). Adage Capital Management has a $124.2 million position in the stock, comprising 0.3% of its 13F portfolio. On Adage Capital Management's heels is AQR Capital Management, managed by Cliff Asness, which holds a $114.9 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other peers that hold long positions comprise Clifton S. Robbins's Blue Harbour Group, Ken Griffin's Citadel Investment Group and Clint Carlson's Carlson Capital. In terms of the portfolio weights assigned to each position Blue Harbour Group allocated the biggest weight to ITT Inc. (NYSE:ITT), around 5.02% of its 13F portfolio. Scopus Asset Management is also relatively very bullish on the stock, dishing out 0.72 percent of its 13F equity portfolio to ITT.

Since ITT Inc. (NYSE:ITT) has witnessed bearish sentiment from the smart money, it's safe to say that there was a specific group of money managers who were dropping their entire stakes by the end of the third quarter. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management dumped the largest position of the "upper crust" of funds followed by Insider Monkey, worth about $15.1 million in stock. Nick Niell's fund, Arrowgrass Capital Partners, also dumped its stock, about $4.9 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 5 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to ITT Inc. (NYSE:ITT). These stocks are Pegasystems Inc. (NASDAQ:PEGA), Polaris Inc. (NYSE:PII), Acuity Brands, Inc. (NYSE:AYI), and Quanta Services Inc (NYSE:PWR). This group of stocks' market caps are closest to ITT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PEGA,23,733352,-1 PII,25,358943,1 AYI,26,897765,3 PWR,30,881523,1 Average,26,717896,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $718 million. That figure was $517 million in ITT's case. Quanta Services Inc (NYSE:PWR) is the most popular stock in this table. On the other hand Pegasystems Inc. (NASDAQ:PEGA) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks ITT Inc. (NYSE:ITT) is even less popular than PEGA. Hedge funds clearly dropped the ball on ITT as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on ITT as the stock returned 14% during the fourth quarter (through the end of November) and outperformed the market by an even larger margin.

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

Related Content