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Was The Smart Money Right About Caterpillar (CAT)?

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Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of September. At Insider Monkey, we follow nearly 900 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Caterpillar Inc. (NYSE:CAT), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Caterpillar Inc. (NYSE:CAT) was in 53 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 63. CAT has experienced an increase in hedge fund sentiment of late. There were 41 hedge funds in our database with CAT holdings at the end of September. Our calculations also showed that CAT isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

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 124 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.

Ryan Tolkin, CIO of Schonfeld Strategic Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now let's take a look at the fresh hedge fund action surrounding Caterpillar Inc. (NYSE:CAT).

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

Heading into the first quarter of 2021, a total of 53 of the hedge funds tracked by Insider Monkey were long this stock, a change of 29% from the third quarter of 2020. Below, you can check out the change in hedge fund sentiment towards CAT over the last 22 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Caterpillar Inc. (NYSE:CAT) was held by Bill & Melinda Gates Foundation Trust, which reported holding $2049.7 million worth of stock at the end of December. It was followed by Fisher Asset Management with a $1126.3 million position. Other investors bullish on the company included Citadel Investment Group, Diamond Hill Capital, and Adage Capital Management. In terms of the portfolio weights assigned to each position Bill & Melinda Gates Foundation Trust allocated the biggest weight to Caterpillar Inc. (NYSE:CAT), around 9.18% of its 13F portfolio. Socorro Asset Management is also relatively very bullish on the stock, dishing out 3.22 percent of its 13F equity portfolio to CAT.

As one would reasonably expect, specific money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, established the most outsized position in Caterpillar Inc. (NYSE:CAT). Millennium Management had $53.4 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors also initiated a $11.3 million position during the quarter. The following funds were also among the new CAT investors: Steve Cohen's Point72 Asset Management, John Smith Clark's Southpoint Capital Advisors, and Louis Bacon's Moore Global Investments.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Caterpillar Inc. (NYSE:CAT) but similarly valued. These stocks are Square, Inc. (NYSE:SQ), American Express Company (NYSE:AXP), Zoom Video Communications, Inc. (NASDAQ:ZM), The Estee Lauder Companies Inc (NYSE:EL), Intuitive Surgical, Inc. (NASDAQ:ISRG), General Electric Company (NYSE:GE), and Rio Tinto Group (NYSE:RIO). This group of stocks' market valuations match CAT's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SQ,89,8819199,16 AXP,60,21887073,12 ZM,59,6002261,3 EL,51,3593398,5 ISRG,49,1802145,-1 GE,69,5684620,24 RIO,26,1711997,3 Average,57.6,7071528,8.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 57.6 hedge funds with bullish positions and the average amount invested in these stocks was $7072 million. That figure was $4158 million in CAT's case. Square, Inc. (NYSE:SQ) is the most popular stock in this table. On the other hand Rio Tinto Group (NYSE:RIO) is the least popular one with only 26 bullish hedge fund positions. Caterpillar Inc. (NYSE:CAT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CAT is 56.7. 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 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. A small number of hedge funds were also right about betting on CAT as the stock returned 26.6% since the end of the fourth quarter (through 4/30) 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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