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Were These Hedge Funds Right About Buying Caterpillar Inc. (CAT)?

Asma UL Husna
·6 min read

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Caterpillar Inc. (NYSE:CAT)? The smart money sentiment can provide an answer to this question.

Is Caterpillar Inc. (NYSE:CAT) a sound investment today? Money managers were becoming more confident. The number of bullish hedge fund positions inched up by 5 in recent months. Caterpillar Inc. (NYSE:CAT) was in 39 hedge funds' portfolios at the end of June. The all time high for this statistics is 63. Our calculations also showed that CAT 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). There were 34 hedge funds in our database with CAT positions at the end of the first quarter. Video: 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 a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Anna Nikolayevsky Axel Capital
Anna Nikolayevsky Axel Capital

Anna Nikolayevsky of Axel Capital

At Insider Monkey we scour multiple sources to uncover 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 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. Keeping this in mind let's review the key hedge fund action encompassing Caterpillar Inc. (NYSE:CAT).

How have hedgies been trading Caterpillar Inc. (NYSE:CAT)?

Heading into the third quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CAT over the last 20 quarters. With hedgies' capital changing hands, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Is CAT A Good Stock To Buy?
Is CAT A Good Stock To Buy?

Among these funds, Bill & Melinda Gates Foundation Trust held the most valuable stake in Caterpillar Inc. (NYSE:CAT), which was worth $1424.5 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $733.6 million worth of shares. Citadel Investment Group, Citadel Investment Group, and AQR Capital 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 Axel Capital Management allocated the biggest weight to Caterpillar Inc. (NYSE:CAT), around 14.66% of its 13F portfolio. Bill & Melinda Gates Foundation Trust is also relatively very bullish on the stock, designating 7.97 percent of its 13F equity portfolio to CAT.

As aggregate interest increased, key money managers were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, initiated the most outsized position in Caterpillar Inc. (NYSE:CAT). Citadel Investment Group had $130 million invested in the company at the end of the quarter. Renaissance Technologies also made a $53.9 million investment in the stock during the quarter. The other funds with brand new CAT positions are Anand Parekh's Alyeska Investment Group, Dmitry Balyasny's Balyasny Asset Management, and Anna Nikolayevsky's Axel Capital Management.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Caterpillar Inc. (NYSE:CAT) but similarly valued. These stocks are Dominion Energy Inc. (NYSE:D), The Goldman Sachs Group, Inc. (NYSE:GS), The Estee Lauder Companies Inc (NYSE:EL), The Blackstone Group Inc. (NYSE:BX), Stryker Corporation (NYSE:SYK), Intuitive Surgical, Inc. (NASDAQ:ISRG), and Anthem Inc (NYSE:ANTM). All of these stocks' market caps resemble CAT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position D,33,366229,-1 GS,69,3543027,-5 EL,46,1197830,2 BX,47,1434341,-2 SYK,50,1257094,2 ISRG,43,1094503,-7 ANTM,69,4103137,-1 Average,51,1856594,-1.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 51 hedge funds with bullish positions and the average amount invested in these stocks was $1857 million. That figure was $2668 million in CAT's case. The Goldman Sachs Group, Inc. (NYSE:GS) is the most popular stock in this table. On the other hand Dominion Energy Inc. (NYSE:D) is the least popular one with only 33 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 36.9. 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 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on CAT as the stock returned 25.8% since the end of the second quarter (through 10/30) 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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