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Were Hedge Funds Right About Piling Into Illinois Tool Works (ITW)?

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Is Illinois Tool Works Inc. (NYSE:ITW) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is Illinois Tool Works Inc. (NYSE:ITW) the right pick for your portfolio? The best stock pickers were becoming more confident. The number of bullish hedge fund positions advanced by 1 in recent months. Illinois Tool Works Inc. (NYSE:ITW) was in 40 hedge funds' portfolios at the end of December. The all time high for this statistic was previously 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ITW isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 39 hedge funds in our database with ITW positions at the end of the third quarter.

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 124 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Ryan Tolkin, CIO of Schonfeld Strategic Advisors

At Insider Monkey we leave no stone unturned when looking for 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 best hydrogen fuel cell 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. Keeping this in mind we're going to take a gander at the key hedge fund action surrounding Illinois Tool Works Inc. (NYSE:ITW).

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

Heading into the first quarter of 2021, a total of 40 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. On the other hand, there were a total of 32 hedge funds with a bullish position in ITW a year ago. With hedge funds' sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

According to Insider Monkey's hedge fund database, Cliff Asness's AQR Capital Management has the biggest position in Illinois Tool Works Inc. (NYSE:ITW), worth close to $170.2 million, amounting to 0.3% of its total 13F portfolio. On AQR Capital Management's heels is Israel Englander of Millennium Management, with a $152 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other members of the smart money that hold long positions encompass Tom Gayner's Markel Gayner Asset Management, Renaissance Technologies and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position Jade Capital Advisors allocated the biggest weight to Illinois Tool Works Inc. (NYSE:ITW), around 2.63% of its 13F portfolio. Arjuna Capital is also relatively very bullish on the stock, earmarking 1.97 percent of its 13F equity portfolio to ITW.

Consequently, key hedge funds were leading the bulls' herd. Scopus Asset Management, managed by Alexander Mitchell, assembled the most outsized position in Illinois Tool Works Inc. (NYSE:ITW). Scopus Asset Management had $9.2 million invested in the company at the end of the quarter. Greg Eisner's Engineers Gate Manager also initiated a $3.5 million position during the quarter. The following funds were also among the new ITW investors: Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors, Jinghua Yan's TwinBeech Capital, and Greg Poole's Echo Street Capital Management.

Let's check out hedge fund activity in other stocks similar to Illinois Tool Works Inc. (NYSE:ITW). These stocks are Global Payments Inc (NYSE:GPN), Equinix, Inc. (REIT) (NASDAQ:EQIX), The PNC Financial Services Group Inc. (NYSE:PNC), Brookfield Asset Management Inc. (NYSE:BAM), Ecolab Inc. (NYSE:ECL), Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), and Dominion Energy Inc. (NYSE:D). All of these stocks' market caps match ITW's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GPN,55,5554643,-2 EQIX,42,2001101,0 PNC,35,188415,-2 BAM,38,1330514,3 ECL,45,2449625,-7 VRTX,53,3108859,-2 D,47,1506824,10 Average,45,2305712,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 45 hedge funds with bullish positions and the average amount invested in these stocks was $2306 million. That figure was $704 million in ITW's case. Global Payments Inc (NYSE:GPN) is the most popular stock in this table. On the other hand The PNC Financial Services Group Inc. (NYSE:PNC) is the least popular one with only 35 bullish hedge fund positions. Illinois Tool Works Inc. (NYSE:ITW) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ITW is 48.5. 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 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. A small number of hedge funds were also right about betting on ITW as the stock returned 13.6% since the end of the fourth quarter (through 4/30) 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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