Did Hedge Funds Make The Right Call On CACI International Inc (CACI) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards CACI International Inc (NYSE:CACI) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is CACI International Inc (NYSE:CACI) going to take off soon? Investors who are in the know were getting more optimistic. The number of long hedge fund positions improved by 1 lately. Our calculations also showed that CACI isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 58 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.

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now let’s analyze the fresh hedge fund action encompassing CACI International Inc (NYSE:CACI).

What have hedge funds been doing with CACI International Inc (NYSE:CACI)?

At Q1’s end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CACI 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.

More specifically, AQR Capital Management was the largest shareholder of CACI International Inc (NYSE:CACI), with a stake worth $91.9 million reported as of the end of September. Trailing AQR Capital Management was Horizon Asset Management, which amassed a stake valued at $88.4 million. Citadel Investment Group, GLG Partners, and SG 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 SG Capital Management allocated the biggest weight to CACI International Inc (NYSE:CACI), around 7.07% of its 13F portfolio. Horizon Asset Management is also relatively very bullish on the stock, designating 3.91 percent of its 13F equity portfolio to CACI.

As aggregate interest increased, some big names have been driving this bullishness. Brant Point Investment Management, managed by Ira Unschuld, initiated the biggest position in CACI International Inc (NYSE:CACI). Brant Point Investment Management had $8.9 million invested in the company at the end of the quarter. George McCabe’s Portolan Capital Management also made a $8.3 million investment in the stock during the quarter. The following funds were also among the new CACI investors: Mark Coe’s Intrinsic Edge Capital, Vikas Lunia’s Lunia Capital, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as CACI International Inc (NYSE:CACI) but similarly valued. These stocks are News Corp (NASDAQ:NWSA), PRA Health Sciences Inc (NASDAQ:PRAH), Reinsurance Group of America Inc (NYSE:RGA), and Vereit Inc (NYSE:VER). This group of stocks’ market valuations resemble CACI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $269 million. That figure was $322 million in CACI’s case. Reinsurance Group of America Inc (NYSE:RGA) is the most popular stock in this table. On the other hand Vereit Inc (NYSE:VER) is the least popular one with only 18 bullish hedge fund positions. CACI International Inc (NYSE:CACI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately CACI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CACI investors were disappointed as the stock returned 2.7% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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