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Were Hedge Funds Right About Cummins Inc. (CMI)?

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  • CMI

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the fourth quarter of 2019. A significant number of hedge funds continued their strong performance in 2020 and 2021 as well. We get to see hedge funds' thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Cummins Inc. (NYSE:CMI).

Is Cummins Inc. (NYSE:CMI) a healthy stock for your portfolio? Investors who are in the know were taking a bullish view. The number of bullish hedge fund bets improved by 8 lately. Cummins Inc. (NYSE:CMI) was in 45 hedge funds' portfolios at the end of June. The all time high for this statistic is 49. Our calculations also showed that CMI isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Today there are numerous gauges shareholders employ to assess their stock investments. A duo of the most under-the-radar gauges are hedge fund and insider trading moves. Our experts have shown that, historically, those who follow the top picks of the top investment managers can trounce the market by a solid margin (see the details here). Also, our monthly newsletter's portfolio of long stock picks returned 185.4% since March 2017 (through August 2021) and beat the S&P 500 Index by more than 79 percentage points. You can download a sample issue of this newsletter on our website.

Stan Druckenmiller DUQUESNE CAPITAL
Stan Druckenmiller DUQUESNE CAPITAL

Stanley Druckenmiller of Duquesne Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, billionaire John Paulson is loading up on the miners, so we are checking out stock pitches like this mining stock. We go through lists like the 10 best EV 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 check out the key hedge fund action regarding Cummins Inc. (NYSE:CMI).

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

At Q2's end, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 22% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CMI over the last 24 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, GLG Partners held the most valuable stake in Cummins Inc. (NYSE:CMI), which was worth $253.2 million at the end of the second quarter. On the second spot was AQR Capital Management which amassed $230.2 million worth of shares. Millennium Management, Duquesne Capital, and D E Shaw 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 Socorro Asset Management allocated the biggest weight to Cummins Inc. (NYSE:CMI), around 4.34% of its 13F portfolio. Duquesne Capital is also relatively very bullish on the stock, dishing out 2.27 percent of its 13F equity portfolio to CMI.

As aggregate interest increased, specific money managers have been driving this bullishness. Renaissance Technologies, established the largest position in Cummins Inc. (NYSE:CMI). Renaissance Technologies had $49.7 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital also made a $34.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Anand Parekh's Alyeska Investment Group, Robert Bishop's Impala Asset Management, and Ray Dalio's Bridgewater Associates.

Let's also examine hedge fund activity in other stocks similar to Cummins Inc. (NYSE:CMI). These stocks are Xilinx, Inc. (NASDAQ:XLNX), TransDigm Group Incorporated (NYSE:TDG), Xcel Energy Inc (NASDAQ:XEL), Brown-Forman Corporation (NYSE:BF), Alcon Inc. (NYSE:ALC), Republic Services, Inc. (NYSE:RSG), and Otis Worldwide Corporation (NYSE:OTIS). This group of stocks' market values are similar to CMI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XLNX,59,4162249,2 TDG,57,7351832,-5 XEL,22,235410,4 BF,31,1667783,-4 ALC,22,727825,-1 RSG,34,1289299,-2 OTIS,45,2406679,-7 Average,38.6,2548725,-1.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.6 hedge funds with bullish positions and the average amount invested in these stocks was $2549 million. That figure was $1102 million in CMI's case. Xilinx, Inc. (NASDAQ:XLNX) is the most popular stock in this table. On the other hand Xcel Energy Inc (NASDAQ:XEL) is the least popular one with only 22 bullish hedge fund positions. Cummins Inc. (NYSE:CMI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CMI is 68.6. 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 positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and beat the market again by 3.1 percentage points. Unfortunately CMI wasn't nearly as popular as these 5 stocks and hedge funds that were betting on CMI were disappointed as the stock returned -2.2% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.