Ecolab Inc. (ECL): Are Hedge Funds Right About This Stock?

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Ecolab Inc. (NYSE:ECL) based on those filings.

Ecolab Inc. (NYSE:ECL) has experienced a decrease in hedge fund sentiment lately. ECL was in 38 hedge funds’ portfolios at the end of March. There were 44 hedge funds in our database with ECL holdings at the end of the previous quarter. 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 51 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

William Von Mueffling of Cantillon Capital Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the key hedge fund action encompassing Ecolab Inc. (NYSE:ECL).

Hedge fund activity in Ecolab Inc. (NYSE:ECL)

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ECL over the last 18 quarters. So, let’s examine 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, dishing out 5.02 percent of its 13F equity portfolio to ECL.

Because Ecolab Inc. (NYSE:ECL) has witnessed declining sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of fund managers that slashed their positions entirely in the third quarter. Interestingly, Phill Gross and Robert Atchinson’s Adage Capital Management said goodbye to the largest investment of the “upper crust” of funds tracked by Insider Monkey, valued at an estimated $68.3 million in stock, and Jonathan Barrett and Paul Segal’s Luminus Management was right behind this move, as the fund sold off about $24 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 6 funds in the third quarter.

Let’s go over 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). This group of 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 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on ECL as the stock returned 36.4% so far in the second quarter and outperformed the market by an even larger margin.

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