U.S. markets closed

Were Hedge Funds Right About Souring On Curtiss-Wright Corp. (CW)?

Debasis Saha

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Curtiss-Wright Corp. (NYSE:CW) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Curtiss-Wright Corp. (NYSE:CW) worth your attention right now? The best stock pickers are becoming less confident. The number of long hedge fund positions retreated by 1 in recent months. Our calculations also showed that CW isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 41 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.

[caption id="attachment_375529" align="aligncenter" width="400"] Mario Gabelli of GAMCO Investors[/caption]

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind let's go over the fresh hedge fund action regarding Curtiss-Wright Corp. (NYSE:CW).

How have hedgies been trading Curtiss-Wright Corp. (NYSE:CW)?

Heading into the first quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in CW over the last 18 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CW A Good Stock To Buy?

More specifically, AQR Capital Management was the largest shareholder of Curtiss-Wright Corp. (NYSE:CW), with a stake worth $157 million reported as of the end of September. Trailing AQR Capital Management was GAMCO Investors, which amassed a stake valued at $63.2 million. GLG Partners, Citadel Investment Group, 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 Jade Capital Advisors allocated the biggest weight to Curtiss-Wright Corp. (NYSE:CW), around 1.93% of its 13F portfolio. GAMCO Investors is also relatively very bullish on the stock, designating 0.5 percent of its 13F equity portfolio to CW.

Judging by the fact that Curtiss-Wright Corp. (NYSE:CW) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there exists a select few fund managers that elected to cut their full holdings by the end of the third quarter. Intriguingly, Ken Fisher's Fisher Asset Management sold off the largest investment of all the hedgies monitored by Insider Monkey, valued at an estimated $3.2 million in stock, and Minhua Zhang's Weld Capital Management was right behind this move, as the fund dropped about $2.2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Curtiss-Wright Corp. (NYSE:CW) but similarly valued. We will take a look at Nutanix, Inc. (NASDAQ:NTNX), MKS Instruments, Inc. (NASDAQ:MKSI), Parsley Energy Inc (NYSE:PE), and Wyndham Hotels & Resorts, Inc. (NYSE:WH). This group of stocks' market valuations resemble CW's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NTNX,32,855350,6 MKSI,28,445354,10 PE,52,1041267,4 WH,44,960213,4 Average,39,825546,6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $826 million. That figure was $405 million in CW's case. Parsley Energy Inc (NYSE:PE) is the most popular stock in this table. On the other hand MKS Instruments, Inc. (NASDAQ:MKSI) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Curtiss-Wright Corp. (NYSE:CW) is even less popular than MKSI. Hedge funds dodged a bullet by taking a bearish stance towards CW. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. Unfortunately CW wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CW investors were disappointed as the stock returned -37.1% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in Q1. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

Related Content