At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Textron Inc. (NYSE:TXT) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Textron Inc. (NYSE:TXT) an exceptional investment today? The smart money was getting more optimistic. The number of bullish hedge fund bets went up by 2 in recent months. Textron Inc. (NYSE:TXT) was in 24 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 32. Our calculations also showed that TXT isn't among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.
Joel Greenblatt of Gotham Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Now let's take a glance at the recent hedge fund action surrounding Textron Inc. (NYSE:TXT).
What does smart money think about Textron Inc. (NYSE:TXT)?
Heading into the third quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in TXT a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, GAMCO Investors was the largest shareholder of Textron Inc. (NYSE:TXT), with a stake worth $76.8 million reported as of the end of September. Trailing GAMCO Investors was Holocene Advisors, which amassed a stake valued at $56.3 million. AQR Capital Management, Balyasny Asset Management, and Citadel Investment Group 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 Barington Capital Group allocated the biggest weight to Textron Inc. (NYSE:TXT), around 3.05% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, dishing out 1.06 percent of its 13F equity portfolio to TXT.
With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls' herd. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the biggest position in Textron Inc. (NYSE:TXT). Balyasny Asset Management had $25 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $12.2 million position during the quarter. The other funds with brand new TXT positions are Michael Price's MFP Investors, Michael Cowley's Sandbar Asset Management, and Richard Scott Greeder's Broad Bay Capital.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Textron Inc. (NYSE:TXT) but similarly valued. We will take a look at The Scotts Miracle-Gro Company (NYSE:SMG), Molson Coors Beverage Company (NYSE:TAP), Gaming and Leisure Properties Inc (NASDAQ:GLPI), Melco Resorts & Entertainment Limited (NASDAQ:MLCO), Ally Financial Inc (NYSE:ALLY), Credit Acceptance Corp. (NASDAQ:CACC), and Livongo Health, Inc. (NASDAQ:LVGO). This group of stocks' market values resemble TXT's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SMG,30,307814,2 TAP,36,274462,2 GLPI,35,498974,0 MLCO,32,610443,4 ALLY,54,1635686,9 CACC,23,985846,1 LVGO,36,338665,19 Average,35.1,664556,5.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.1 hedge funds with bullish positions and the average amount invested in these stocks was $665 million. That figure was $268 million in TXT's case. Ally Financial Inc (NYSE:ALLY) is the most popular stock in this table. On the other hand Credit Acceptance Corp. (NASDAQ:CACC) is the least popular one with only 23 bullish hedge fund positions. Textron Inc. (NYSE:TXT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TXT is 31.1. 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 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. A small number of hedge funds were also right about betting on TXT, though not to the same extent, as the stock returned 7.2% so far during Q3 and outperformed the market.
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Disclosure: None. This article was originally published at Insider Monkey.