At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards ITT Inc. (NYSE:ITT) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is ITT Inc. (NYSE:ITT) undervalued? The best stock pickers were becoming less hopeful. The number of bullish hedge fund bets shrunk by 3 in recent months. ITT Inc. (NYSE:ITT) was in 25 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 28. Our calculations also showed that ITT isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 28 hedge funds in our database with ITT holdings at the end of March. Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Phillip Gross of Adage Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. With all of this in mind let's take a glance at the recent hedge fund action regarding ITT Inc. (NYSE:ITT).
Hedge fund activity in ITT Inc. (NYSE:ITT)
Heading into the third quarter of 2020, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. On the other hand, there were a total of 25 hedge funds with a bullish position in ITT a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
More specifically, Adage Capital Management was the largest shareholder of ITT Inc. (NYSE:ITT), with a stake worth $241.4 million reported as of the end of September. Trailing Adage Capital Management was Paradice Investment Management, which amassed a stake valued at $88.4 million. AQR Capital Management, GAMCO Investors, and Arrowstreet Capital 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 6.66% of its 13F portfolio. Jade Capital Advisors is also relatively very bullish on the stock, designating 2.02 percent of its 13F equity portfolio to ITT.
Since ITT Inc. (NYSE:ITT) has faced bearish sentiment from hedge fund managers, we can see that there were a few hedge funds who sold off their full holdings in the second quarter. It's worth mentioning that Clint Murray's Lodge Hill Capital dropped the largest investment of the "upper crust" of funds monitored by Insider Monkey, worth an estimated $4.5 million in stock, and Greg Eisner's Engineers Gate Manager was right behind this move, as the fund sold off about $1.7 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 3 funds in the second quarter.
Let's also examine 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 Brunswick Corporation (NYSE:BC), National Instruments Corporation (NASDAQ:NATI), CDK Global Inc (NASDAQ:CDK), Turkcell Iletisim Hizmetleri A.S. (NYSE:TKC), Lincoln Electric Holdings, Inc. (NASDAQ:LECO), Euronet Worldwide, Inc. (NASDAQ:EEFT), and Mirati Therapeutics, Inc. (NASDAQ:MRTX). This group of stocks' market values are similar to ITT's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BC,35,1425715,12 NATI,35,259007,6 CDK,32,323704,8 TKC,5,48945,2 LECO,22,204039,3 EEFT,37,311496,7 MRTX,36,1586629,3 Average,28.9,594219,5.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.9 hedge funds with bullish positions and the average amount invested in these stocks was $594 million. That figure was $512 million in ITT's case. Euronet Worldwide, Inc. (NASDAQ:EEFT) is the most popular stock in this table. On the other hand Turkcell Iletisim Hizmetleri A.S. (NYSE:TKC) is the least popular one with only 5 bullish hedge fund positions. ITT Inc. (NYSE:ITT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ITT is 60. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately ITT wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ITT investors were disappointed as the stock returned -0.5% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.