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Is ITT A Good Stock To Buy According To Hedge Funds?

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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in ITT Inc. (NYSE:ITT)? The smart money sentiment can provide an answer to this question.

Is ITT a good stock to buy? ITT Inc. (NYSE:ITT) investors should be aware of an increase in activity from the world's largest hedge funds in recent months. ITT Inc. (NYSE:ITT) was in 30 hedge funds' portfolios at the end of September. The all time high for this statistic is 28. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. 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 for a quick look at the top 5 stocks).

Video: 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' 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 S&P 500 ETFs by 66 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 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.

Phill Gross Adage Capital Phillip Gross
Phill Gross Adage Capital Phillip Gross

Phillip Gross of Adage Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let's take a peek at the recent hedge fund action regarding ITT Inc. (NYSE:ITT).

Do Hedge Funds Think ITT Is A Good Stock To Buy Now?

At Q3's end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in ITT over the last 21 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, Adage Capital Management was the largest shareholder of ITT Inc. (NYSE:ITT), with a stake worth $163.4 million reported as of the end of September. Trailing Adage Capital Management was Paradice Investment Management, which amassed a stake valued at $85.1 million. Arrowstreet Capital, Balyasny Asset Management, and Millennium Management 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 Paradice Investment Management allocated the biggest weight to ITT Inc. (NYSE:ITT), around 6.17% of its 13F portfolio. Cinctive Capital Management is also relatively very bullish on the stock, designating 0.8 percent of its 13F equity portfolio to ITT.

Consequently, key hedge funds were leading the bulls' herd. Engineers Gate Manager, managed by Greg Eisner, established the largest position in ITT Inc. (NYSE:ITT). Engineers Gate Manager had $2 million invested in the company at the end of the quarter. Parvinder Thiara's Athanor Capital also initiated a $1.1 million position during the quarter. The following funds were also among the new ITT investors: Benjamin A. Smith's Laurion Capital Management, Mika Toikka's AlphaCrest Capital Management, and Jinghua Yan's TwinBeech Capital.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as ITT Inc. (NYSE:ITT) but similarly valued. We will take a look at BlackLine, Inc. (NASDAQ:BL), Eastgroup Properties Inc (NYSE:EGP), Ingredion Incorporated (NYSE:INGR), First Industrial Realty Trust, Inc. (NYSE:FR), Nielsen Holdings plc (NYSE:NLSN), CoreSite Realty Corp (NYSE:COR), and Apartment Investment and Management Co. (NYSE:AIV). This group of stocks' market valuations resemble ITT's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BL,17,233073,-1 EGP,10,51895,-4 INGR,23,243468,1 FR,26,418925,-4 NLSN,30,943619,-1 COR,19,163584,-2 AIV,25,484646,1 Average,21.4,362744,-1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.4 hedge funds with bullish positions and the average amount invested in these stocks was $363 million. That figure was $478 million in ITT's case. Nielsen Holdings plc (NYSE:NLSN) is the most popular stock in this table. On the other hand Eastgroup Properties Inc (NYSE:EGP) is the least popular one with only 10 bullish hedge fund positions. ITT Inc. (NYSE:ITT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ITT is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on ITT as the stock returned 31.5% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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