Did Hedge Funds Make The Right Call On Cincinnati Financial Corporation (CINF) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Cincinnati Financial Corporation (NASDAQ:CINF) and determine whether hedge funds skillfully traded this stock.

Hedge fund interest in Cincinnati Financial Corporation (NASDAQ:CINF) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Kansas City Southern (NYSE:KSU), International Paper Company (NYSE:IP), and Atmos Energy Corporation (NYSE:ATO) to gather more data points. Our calculations also showed that CINF 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.

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Steven Cohen of Point72 Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. With all of this in mind let’s view the recent hedge fund action regarding Cincinnati Financial Corporation (NASDAQ:CINF).

How are hedge funds trading Cincinnati Financial Corporation (NASDAQ:CINF)?

Heading into the second quarter of 2020, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in CINF a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Select Equity Group held the most valuable stake in Cincinnati Financial Corporation (NASDAQ:CINF), which was worth $369.4 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $35 million worth of shares. D E Shaw, Prospector Partners, and Millennium 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 Select Equity Group allocated the biggest weight to Cincinnati Financial Corporation (NASDAQ:CINF), around 2.55% of its 13F portfolio. Prospector Partners is also relatively very bullish on the stock, earmarking 1.82 percent of its 13F equity portfolio to CINF.

Due to the fact that Cincinnati Financial Corporation (NASDAQ:CINF) has witnessed falling interest from hedge fund managers, it’s safe to say that there is a sect of fund managers that elected to cut their entire stakes in the first quarter. At the top of the heap, Michael Kharitonov and Jon David McAuliffe’s Voleon Capital said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, worth close to $18.7 million in stock. Steve Cohen’s fund, Point72 Asset Management, also said goodbye to its stock, about $1.4 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to Cincinnati Financial Corporation (NASDAQ:CINF). We will take a look at Kansas City Southern (NYSE:KSU), International Paper Company (NYSE:IP), Atmos Energy Corporation (NYSE:ATO), and Dover Corporation (NYSE:DOV). This group of stocks’ market values are similar to CINF’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $405 million. That figure was $484 million in CINF’s case. Kansas City Southern (NYSE:KSU) is the most popular stock in this table. On the other hand Atmos Energy Corporation (NYSE:ATO) is the least popular one with only 21 bullish hedge fund positions. Cincinnati Financial Corporation (NASDAQ:CINF) 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 CINF wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CINF investors were disappointed as the stock returned -14.3% 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.