Did Hedge Funds Make The Right Call On Ecolab Inc. (ECL) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtEcolab Inc. (NYSE:ECL) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Ecolab Inc. (NYSE:ECL) a bargain? Hedge funds were in a bearish mood. The number of bullish hedge fund bets retreated by 6 recently. Our calculations also showed that ECL 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). ECL was in 38 hedge funds’ portfolios at the end of March. There were 44 hedge funds in our database with ECL positions at the end of the previous quarter.

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.

Phill Gross of Adage Capital 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 latest hedge fund action regarding Ecolab Inc. (NYSE:ECL).

What have hedge funds been doing with Ecolab Inc. (NYSE:ECL)?

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ECL over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Bill & Melinda Gates Foundation Trust was the largest shareholder of Ecolab Inc. (NYSE:ECL), with a stake worth $680.4 million reported as of the end of September. Trailing Bill & Melinda Gates Foundation Trust was Cantillon Capital Management, which amassed a stake valued at $343.8 million. Impax Asset Management, AQR Capital Management, and Markel Gayner Asset 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 Sandbar Asset Management allocated the biggest weight to Ecolab Inc. (NYSE:ECL), around 5.81% of its 13F portfolio. Empirical Capital Partners is also relatively very bullish on the stock, designating 5.02 percent of its 13F equity portfolio to ECL.

Because Ecolab Inc. (NYSE:ECL) has faced bearish sentiment from the smart money, it’s easy to see that there lies a certain “tier” of money managers who sold off their entire stakes last quarter. At the top of the heap, Phill Gross and Robert Atchinson’s Adage Capital Management sold off the biggest position of the “upper crust” of funds monitored by Insider Monkey, comprising close to $68.3 million in stock. Jonathan Barrett and Paul Segal’s fund, Luminus Management, also cut its stock, about $24 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 6 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Ecolab Inc. (NYSE:ECL). We will take a look at Intercontinental Exchange Inc (NYSE:ICE), CSX Corporation (NYSE:CSX), Air Products & Chemicals, Inc. (NYSE:APD), and Shopify Inc (NYSE:SHOP). All of these stocks’ market caps resemble ECL’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.5 hedge funds with bullish positions and the average amount invested in these stocks was $2137 million. That figure was $1598 million in ECL’s case. Intercontinental Exchange Inc (NYSE:ICE) is the most popular stock in this table. On the other hand Air Products & Chemicals, Inc. (NYSE:APD) is the least popular one with only 41 bullish hedge fund positions. Compared to these stocks Ecolab Inc. (NYSE:ECL) is even less popular than APD. Hedge funds clearly dropped the ball on ECL as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on ECL as the stock returned 28% in the second quarter and outperformed the market by an even larger margin.

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