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Illinois Tool Works Inc. (ITW): Are Hedge Funds Right About This Stock?

Asma UL Husna

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of March 31st, a week after the market trough. In this article we look at what those investors think of Illinois Tool Works Inc. (NYSE:ITW).

Illinois Tool Works Inc. (NYSE:ITW) investors should pay attention to an increase in activity from the world's largest hedge funds lately. Our calculations also showed that ITW isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 51 percentage points since March 2017 (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 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_193030" align="aligncenter" width="399"] Tom Gayner of Markel Gayner Asset Management[/caption]

Tom Gayner

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020's unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we're going to analyze the fresh hedge fund action encompassing Illinois Tool Works Inc. (NYSE:ITW).

Hedge fund activity in Illinois Tool Works Inc. (NYSE:ITW)

Heading into the second quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ITW over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, AQR Capital Management was the largest shareholder of Illinois Tool Works Inc. (NYSE:ITW), with a stake worth $78 million reported as of the end of September. Trailing AQR Capital Management was Markel Gayner Asset Management, which amassed a stake valued at $46.5 million. Two Sigma Advisors, Renaissance Technologies, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Trellus Management Company allocated the biggest weight to Illinois Tool Works Inc. (NYSE:ITW), around 2.37% of its 13F portfolio. Arjuna Capital is also relatively very bullish on the stock, designating 1.95 percent of its 13F equity portfolio to ITW.

As industrywide interest jumped, some big names have jumped into Illinois Tool Works Inc. (NYSE:ITW) headfirst. Renaissance Technologies, created the largest position in Illinois Tool Works Inc. (NYSE:ITW). Renaissance Technologies had $30.2 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also initiated a $17.5 million position during the quarter. The other funds with brand new ITW positions are David Costen Haley's HBK Investments, D. E. Shaw's D E Shaw, and Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management.

Let's now review hedge fund activity in other stocks similar to Illinois Tool Works Inc. (NYSE:ITW). We will take a look at Ecolab Inc. (NYSE:ECL), Intercontinental Exchange Inc (NYSE:ICE), CSX Corporation (NASDAQ:CSX), and Air Products & Chemicals, Inc. (NYSE:APD). This group of stocks' market values resemble ITW's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ECL,38,1597530,-6 ICE,61,2491084,9 CSX,57,2811477,11 APD,41,352215,-13 Average,49.25,1813077,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 49.25 hedge funds with bullish positions and the average amount invested in these stocks was $1813 million. That figure was $297 million in ITW's case. Intercontinental Exchange Inc (NYSE:ICE) is the most popular stock in this table. On the other hand Ecolab Inc. (NYSE:ECL) is the least popular one with only 38 bullish hedge fund positions. Compared to these stocks Illinois Tool Works Inc. (NYSE:ITW) is even less popular than ECL. Hedge funds clearly dropped the ball on ITW as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on ITW as the stock returned 21.3% so far in the second quarter and outperformed the market by an even larger margin.

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

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