How do we determine whether Ecolab Inc. (NYSE:ECL) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Ecolab Inc. (NYSE:ECL) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 27 hedge funds' portfolios at the end of June. Our calculations also showed that ECL isn't among the 30 most popular stocks among hedge funds (see the video below). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as The Blackstone Group Inc. (NYSE:BX), DuPont de Nemours, Inc. (NYSE:DD), and General Motors Company (NYSE:GM) to gather more data points. 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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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 review the recent hedge fund action regarding Ecolab Inc. (NYSE:ECL).
How are hedge funds trading Ecolab Inc. (NYSE:ECL)?
Heading into the third quarter of 2019, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ECL over the last 16 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
More specifically, Bill & Melinda Gates Foundation Trust was the largest shareholder of Ecolab Inc. (NYSE:ECL), with a stake worth $862.1 million reported as of the end of March. Trailing Bill & Melinda Gates Foundation Trust was Cantillon Capital Management, which amassed a stake valued at $449.1 million. Eagle Capital Management, Impax Asset Management, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Ecolab Inc. (NYSE:ECL) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of funds that elected to cut their positions entirely in the second quarter. At the top of the heap, Jonathan Barrett and Paul Segal's Luminus Management cut the largest position of the 750 funds followed by Insider Monkey, comprising about $20.2 million in stock, and Ryan Pedlow's Two Creeks Capital Management was right behind this move, as the fund dumped about $13 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Ecolab Inc. (NYSE:ECL) but similarly valued. We will take a look at The Blackstone Group Inc. (NYSE:BX), DuPont de Nemours, Inc. (NYSE:DD), General Motors Company (NYSE:GM), and Allergan plc (NYSE:AGN). This group of stocks' market valuations resemble ECL's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BX,30,519284,-4 DD,42,1023646,-19 GM,49,5743946,-4 AGN,80,6167857,27 Average,50.25,3363683,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 50.25 hedge funds with bullish positions and the average amount invested in these stocks was $3364 million. That figure was $2048 million in ECL's case. Allergan plc (NYSE:AGN) is the most popular stock in this table. On the other hand The Blackstone Group Inc. (NYSE:BX) is the least popular one with only 30 bullish hedge fund positions. Compared to these stocks Ecolab Inc. (NYSE:ECL) is even less popular than BX. Hedge funds dodged a bullet by taking a bearish stance towards ECL. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ECL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); ECL investors were disappointed as the stock returned 0.5% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.