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Hedge Funds Dropped The Ball On Johnson Controls International plc (JCI)

Asma UL Husna

Is Johnson Controls International plc (NYSE:JCI) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Johnson Controls International plc (NYSE:JCI) a worthy investment now? The best stock pickers are getting more optimistic. The number of bullish hedge fund bets went up by 10 recently. Our calculations also showed that JCI isn't among the 30 most popular stocks among hedge funds.

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 32 percentage points since May 2014 through March 12, 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.

[caption id="attachment_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/caption]

Mario Gabelli of GAMCO Investors

We're going to review the recent hedge fund action encompassing Johnson Controls International plc (NYSE:JCI).

What have hedge funds been doing with Johnson Controls International plc (NYSE:JCI)?

At the end of the fourth quarter, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 63% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in JCI over the last 14 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

JCI_mar2019

The largest stake in Johnson Controls International plc (NYSE:JCI) was held by Scopia Capital, which reported holding $238.2 million worth of stock at the end of September. It was followed by Diamond Hill Capital with a $122.3 million position. Other investors bullish on the company included GAMCO Investors, D E Shaw, and Millennium Management.

As industrywide interest jumped, specific money managers have jumped into Johnson Controls International plc (NYSE:JCI) headfirst. Adage Capital Management, managed by Phill Gross and Robert Atchinson, created the most valuable position in Johnson Controls International plc (NYSE:JCI). Adage Capital Management had $19.6 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also initiated a $17.3 million position during the quarter. The other funds with brand new JCI positions are Matthew Tewksbury's Stevens Capital Management, Jeffrey Talpins's Element Capital Management, and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Johnson Controls International plc (NYSE:JCI) but similarly valued. We will take a look at Monster Beverage Corp (NASDAQ:MNST), eBay Inc (NASDAQ:EBAY), Moody's Corporation (NYSE:MCO), and The Williams Companies, Inc. (NYSE:WMB). This group of stocks' market valuations are closest to JCI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MNST,32,1256081,0 EBAY,42,2224982,-2 MCO,32,5116472,-3 WMB,39,1574246,-4 Average,36.25,2542945,-2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.25 hedge funds with bullish positions and the average amount invested in these stocks was $2543 million. That figure was $644 million in JCI's case. eBay Inc (NASDAQ:EBAY) is the most popular stock in this table. On the other hand Monster Beverage Corp (NASDAQ:MNST) is the least popular one with only 32 bullish hedge fund positions. Compared to these stocks Johnson Controls International plc (NYSE:JCI) is even less popular than MNST. Most hedge funds clearly missed out on JCI even though some hedge funds made timely bets on the stock during Q4. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. A few hedge funds were also right about betting on JCI as the stock returned 21.7% and outperformed the market as well.

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

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