Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Textron Inc. (NYSE:TXT) changed recently.
Textron Inc. (NYSE:TXT) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 23 hedge funds' portfolios at the end of September. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Jack Henry & Associates, Inc. (NASDAQ:JKHY), Tiffany & Co. (NYSE:TIF), and Zebra Technologies Corporation (NASDAQ:ZBRA) to gather more data points. Our calculations also showed that TXT isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_672456" align="aligncenter" width="473"] Michael Hintze of CQS Cayman LP[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the new hedge fund action surrounding Textron Inc. (NYSE:TXT).
What does smart money think about Textron Inc. (NYSE:TXT)?
At Q3's end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TXT over the last 17 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
Among these funds, Citadel Investment Group held the most valuable stake in Textron Inc. (NYSE:TXT), which was worth $127.3 million at the end of the third quarter. On the second spot was GAMCO Investors which amassed $117.7 million worth of shares. AQR Capital Management, D E Shaw, and Levin Easterly Partners 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 Lodge Hill Capital allocated the biggest weight to Textron Inc. (NYSE:TXT), around 2.11% of its 13F portfolio. Levin Easterly Partners is also relatively very bullish on the stock, setting aside 1.8 percent of its 13F equity portfolio to TXT.
Due to the fact that Textron Inc. (NYSE:TXT) has experienced declining sentiment from the entirety of the hedge funds we track, it's safe to say that there exists a select few hedge funds that slashed their full holdings by the end of the third quarter. At the top of the heap, John Overdeck and David Siegel's Two Sigma Advisors cut the biggest position of the 750 funds monitored by Insider Monkey, comprising about $5.7 million in stock. Jeffrey Talpins's fund, Element Capital Management, also dropped its stock, about $2.3 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks similar to Textron Inc. (NYSE:TXT). We will take a look at Jack Henry & Associates, Inc. (NASDAQ:JKHY), Tiffany & Co. (NYSE:TIF), Zebra Technologies Corporation (NASDAQ:ZBRA), and NiSource Inc. (NYSE:NI). All of these stocks' market caps resemble TXT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JKHY,18,181183,0 TIF,30,1500513,8 ZBRA,18,427751,-2 NI,22,811933,0 Average,22,730345,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $730 million. That figure was $658 million in TXT's case. Tiffany & Co. (NYSE:TIF) is the most popular stock in this table. On the other hand Jack Henry & Associates, Inc. (NASDAQ:JKHY) is the least popular one with only 18 bullish hedge fund positions. Textron Inc. (NYSE:TXT) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TXT wasn't nearly as popular as these 20 stocks and hedge funds that were betting on TXT were disappointed as the stock returned -5.6% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.