Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The fourth quarter of 2018 is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 7 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Illinois Tool Works Inc. (NYSE:ITW).
Illinois Tool Works Inc. (NYSE:ITW) investors should be aware of an increase in hedge fund sentiment in recent months. Our calculations also showed that ITW isn't among the 30 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
We're going to take a peek at the key hedge fund action regarding Illinois Tool Works Inc. (NYSE:ITW).
Hedge fund activity in Illinois Tool Works Inc. (NYSE:ITW)
At Q4's end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ITW over the last 14 quarters. With hedgies' capital changing hands, there exists a few key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
The largest stake in Illinois Tool Works Inc. (NYSE:ITW) was held by Ariel Investments, which reported holding $46.1 million worth of stock at the end of September. It was followed by Gotham Asset Management with a $36.9 million position. Other investors bullish on the company included AQR Capital Management, Ashler Capital, and Markel Gayner Asset Management.
As one would reasonably expect, key hedge funds have jumped into Illinois Tool Works Inc. (NYSE:ITW) headfirst. Ashler Capital, managed by Matt Simon (Citadel), initiated the most outsized position in Illinois Tool Works Inc. (NYSE:ITW). Ashler Capital had $34.1 million invested in the company at the end of the quarter. Clint Carlson's Carlson Capital also initiated a $22.2 million position during the quarter. The following funds were also among the new ITW investors: Alexander Mitchell's Scopus Asset Management, Sander Gerber's Hudson Bay Capital Management, and John D. Gillespie's Prospector Partners.
Let's go over hedge fund activity in other stocks similar to Illinois Tool Works Inc. (NYSE:ITW). These stocks are Bank of Montreal (NYSE:BMO), ING Groep N.V. (NYSE:ING), Infosys Limited (NYSE:INFY), and Zoetis Inc (NYSE:ZTS). All of these stocks' market caps match ITW's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BMO,15,392379,2 ING,7,507142,-1 INFY,17,1043271,-1 ZTS,45,1815851,4 Average,21,939661,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $940 million. That figure was $293 million in ITW's case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand ING Groep N.V. (NYSE:ING) is the least popular one with only 7 bullish hedge fund positions. Illinois Tool Works Inc. (NYSE:ITW) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately ITW wasn't in this group. Hedge funds that bet on ITW were disappointed as the stock returned 13.0% and slightly underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.