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Is ETN A Good Stock To Buy According To Hedge Funds?

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Asma UL Husna
·6 min read
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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Eaton Corporation plc (NYSE:ETN).

Is ETN a good stock to buy? Eaton Corporation plc (NYSE:ETN) investors should pay attention to an increase in enthusiasm from smart money recently. Eaton Corporation plc (NYSE:ETN) was in 35 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 42. Our calculations also showed that ETN 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 113% since March 2017 and outperformed the S&P 500 ETFs by more than 66 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Phill Gross Adage Capital Phillip Gross
Phill Gross Adage Capital Phillip Gross

Phillip Gross of Adage Capital

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 we're going to review the latest hedge fund action regarding Eaton Corporation plc (NYSE:ETN).

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

At Q3's end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the previous quarter. On the other hand, there were a total of 34 hedge funds with a bullish position in ETN a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, AQR Capital Management was the largest shareholder of Eaton Corporation plc (NYSE:ETN), with a stake worth $128.4 million reported as of the end of September. Trailing AQR Capital Management was Levin Easterly Partners, which amassed a stake valued at $102 million. Lansdowne Partners, Citadel Investment Group, and Arrowstreet Capital 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 Levin Easterly Partners allocated the biggest weight to Eaton Corporation plc (NYSE:ETN), around 4.05% of its 13F portfolio. Lansdowne Partners is also relatively very bullish on the stock, dishing out 2.86 percent of its 13F equity portfolio to ETN.

As one would reasonably expect, specific money managers were breaking ground themselves. Adage Capital Management, managed by Phill Gross and Robert Atchinson, initiated the most valuable position in Eaton Corporation plc (NYSE:ETN). Adage Capital Management had $19.3 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital also initiated a $15.3 million position during the quarter. The other funds with brand new ETN positions are Louis Bacon's Moore Global Investments, Matthew Hulsizer's PEAK6 Capital Management, and Robert Pohly's Samlyn Capital.

Let's also examine hedge fund activity in other stocks similar to Eaton Corporation plc (NYSE:ETN). We will take a look at DuPont de Nemours Inc (NYSE:DD), Baxter International Inc. (NYSE:BAX), National Grid plc (NYSE:NGG), American Electric Power Company, Inc. (NASDAQ:AEP), Rocket Companies, Inc. (NYSE:RKT), UBS Group AG (NYSE:UBS), and DocuSign, Inc. (NASDAQ:DOCU). This group of stocks' market valuations are closest to ETN's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DD,61,3679088,-3 BAX,51,2025150,-8 NGG,6,379092,4 AEP,30,436472,-4 RKT,22,319461,22 UBS,17,497673,1 DOCU,62,3559604,5 Average,35.6,1556649,2.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.6 hedge funds with bullish positions and the average amount invested in these stocks was $1557 million. That figure was $586 million in ETN's case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 6 bullish hedge fund positions. Eaton Corporation plc (NYSE:ETN) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ETN is 56.9. 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 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. A small number of hedge funds were also right about betting on ETN as the stock returned 14.6% since the end of the third quarter (through 12/18) 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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