Hedge funds and other investment firms run by legendary investors like Israel Englander, Jeffrey Talpins and Ray Dalio are entrusted to manage billions of dollars of accredited investors' money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.
Rockwell Automation Inc. (NYSE:ROK) was in 28 hedge funds' portfolios at the end of March. ROK has experienced a decrease in support from the world's most elite money managers of late. There were 35 hedge funds in our database with ROK holdings at the end of the previous quarter. Our calculations also showed that ROK 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 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 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.
Let's analyze the fresh hedge fund action encompassing Rockwell Automation Inc. (NYSE:ROK).
How have hedgies been trading Rockwell Automation Inc. (NYSE:ROK)?
Heading into the second quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -20% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards ROK over the last 15 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
Among these funds, Two Sigma Advisors held the most valuable stake in Rockwell Automation Inc. (NYSE:ROK), which was worth $126.5 million at the end of the first quarter. On the second spot was Millennium Management which amassed $99.9 million worth of shares. Moreover, Nitorum Capital, Renaissance Technologies, and GAMCO Investors were also bullish on Rockwell Automation Inc. (NYSE:ROK), allocating a large percentage of their portfolios to this stock.
Because Rockwell Automation Inc. (NYSE:ROK) has witnessed falling interest from the smart money, logic holds that there lies a certain "tier" of funds that decided to sell off their full holdings in the third quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the biggest position of the "upper crust" of funds watched by Insider Monkey, valued at an estimated $22.9 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund dropped about $11.5 million worth. These transactions are interesting, as total hedge fund interest fell by 7 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to Rockwell Automation Inc. (NYSE:ROK). These stocks are Boston Properties, Inc. (NYSE:BXP), Ulta Beauty, Inc. (NASDAQ:ULTA), Stanley Black & Decker, Inc. (NYSE:SWK), and ArcelorMittal (NYSE:MT). This group of stocks' market values are closest to ROK's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BXP,27,572101,10 ULTA,43,994415,1 SWK,31,1033655,-4 MT,12,222442,-1 Average,28.25,705653,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $706 million. That figure was $535 million in ROK's case. Ulta Beauty, Inc. (NASDAQ:ULTA) is the most popular stock in this table. On the other hand ArcelorMittal (NYSE:MT) is the least popular one with only 12 bullish hedge fund positions. Rockwell Automation Inc. (NYSE:ROK) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately ROK wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ROK investors were disappointed as the stock returned -10.9% during the same time period 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.