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Was The Smart Money Right About Ecolab Inc. (ECL)?

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·6 min read
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Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Ecolab Inc. (NYSE:ECL).

Ecolab Inc. (NYSE:ECL) shareholders have witnessed a decrease in support from the world's most elite money managers in recent months. Ecolab Inc. (NYSE:ECL) was in 45 hedge funds' portfolios at the end of December. The all time high for this statistic is 52. Our calculations also showed that ECL 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.

William Von Mueffling - Cantillon Capital Management
William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

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. With all of this in mind we're going to analyze the fresh hedge fund action surrounding Ecolab Inc. (NYSE:ECL).

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

At fourth quarter's end, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the third quarter of 2020. The graph below displays the number of hedge funds with bullish position in ECL 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.

Is ECL A Good Stock To Buy?
Is ECL A Good Stock To Buy?

More specifically, Bill & Melinda Gates Foundation Trust was the largest shareholder of Ecolab Inc. (NYSE:ECL), with a stake worth $944.7 million reported as of the end of December. Trailing Bill & Melinda Gates Foundation Trust was Cantillon Capital Management, which amassed a stake valued at $473.9 million. Impax Asset Management, AQR Capital Management, and Markel Gayner Asset 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 Columbus Point allocated the biggest weight to Ecolab Inc. (NYSE:ECL), around 5.4% of its 13F portfolio. Bill & Melinda Gates Foundation Trust is also relatively very bullish on the stock, designating 4.23 percent of its 13F equity portfolio to ECL.

Judging by the fact that Ecolab Inc. (NYSE:ECL) has experienced a decline in interest from hedge fund managers, it's safe to say that there is a sect of funds who were dropping their positions entirely by the end of the fourth quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital sold off the largest stake of the 750 funds tracked by Insider Monkey, comprising about $32.2 million in stock. Josh Donfeld and David Rogers's fund, Castle Hook Partners, also sold off its stock, about $24.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 7 funds by the end of the fourth quarter.

Let's check out hedge fund activity in other stocks similar to Ecolab Inc. (NYSE:ECL). These stocks are Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Dominion Energy Inc. (NYSE:D), Air Products & Chemicals, Inc. (NYSE:APD), Norfolk Southern Corp. (NYSE:NSC), Spotify Technology S.A. (NYSE:SPOT), General Motors Company (NYSE:GM), and Marsh & McLennan Companies, Inc. (NYSE:MMC). All of these stocks' market caps are closest to ECL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VRTX,53,3108859,-2 D,47,1506824,10 APD,50,1282433,1 NSC,44,783686,-3 SPOT,48,2688846,4 GM,70,6332871,10 MMC,43,1747012,8 Average,50.7,2492933,4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.7 hedge funds with bullish positions and the average amount invested in these stocks was $2493 million. That figure was $2450 million in ECL's case. General Motors Company (NYSE:GM) is the most popular stock in this table. On the other hand Marsh & McLennan Companies, Inc. (NYSE:MMC) is the least popular one with only 43 bullish hedge fund positions. Ecolab Inc. (NYSE:ECL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ECL is 27.7. 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. 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 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 surpassed the market again by 1.6 percentage points. Unfortunately ECL wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ECL investors were disappointed as the stock returned 3.8% since the end of December (through 4/30) 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.

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