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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 Rockwell Automation Inc. (NYSE:ROK)? The smart money sentiment can provide an answer to this question.
Is ROK a good stock to buy now? Rockwell Automation Inc. (NYSE:ROK) was in 44 hedge funds' portfolios at the end of September. The all time high for this statistic is 50. ROK has seen a decrease in hedge fund interest lately. There were 50 hedge funds in our database with ROK positions at the end of the second quarter. Our calculations also showed that ROK 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.
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 S&P 500 ETFs by more than 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Bruce Kovner of Caxton Associates LP
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. Keeping this in mind let's take a look at the key hedge fund action surrounding Rockwell Automation Inc. (NYSE:ROK).
Do Hedge Funds Think ROK Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ROK over the last 21 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, Impax Asset Management held the most valuable stake in Rockwell Automation Inc. (NYSE:ROK), which was worth $88.4 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $70.1 million worth of shares. Nitorum Capital, AQR Capital Management, and GAMCO Investors 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 Heathbridge Capital Management allocated the biggest weight to Rockwell Automation Inc. (NYSE:ROK), around 5% of its 13F portfolio. Bourgeon Capital is also relatively very bullish on the stock, designating 2.39 percent of its 13F equity portfolio to ROK.
Judging by the fact that Rockwell Automation Inc. (NYSE:ROK) has experienced falling interest from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedgies that decided to sell off their positions entirely last quarter. At the top of the heap, Aaron Cowen's Suvretta Capital Management sold off the largest stake of the "upper crust" of funds tracked by Insider Monkey, worth about $67.1 million in stock, and Steve Cohen's Point72 Asset Management was right behind this move, as the fund dumped about $27.9 million worth. These moves are interesting, as total hedge fund interest dropped by 6 funds last quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Rockwell Automation Inc. (NYSE:ROK) but similarly valued. We will take a look at Royalty Pharma plc (NASDAQ:RPRX), Lennar Corporation (NYSE:LEN), Xilinx, Inc. (NASDAQ:XLNX), Prudential Financial Inc (NYSE:PRU), Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), Pinterest, Inc. (NYSE:PINS), and ResMed Inc. (NYSE:RMD). This group of stocks' market values resemble ROK's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RPRX,20,2901046,-4 LEN,60,1740218,5 XLNX,46,1198711,-1 PRU,34,479419,8 ALXN,58,3776330,1 PINS,80,3484050,27 RMD,35,236573,10 Average,47.6,1973764,6.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 47.6 hedge funds with bullish positions and the average amount invested in these stocks was $1974 million. That figure was $521 million in ROK's case. Pinterest, Inc. (NYSE:PINS) is the most popular stock in this table. On the other hand Royalty Pharma plc (NASDAQ:RPRX) is the least popular one with only 20 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. Our overall hedge fund sentiment score for ROK is 45.4. 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 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on ROK as the stock returned 13.6% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.