Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. Is Cummins Inc. (NYSE:CMI) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.
Is Cummins Inc. (NYSE:CMI) a cheap stock to buy now? Investors who are in the know are becoming hopeful. The number of bullish hedge fund positions advanced by 5 in recent months. Our calculations also showed that CMI 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). CMI was in 39 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 34 hedge funds in our database with CMI positions at the end of the previous quarter.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Paul Tudor Jones of Tudor Investment Corp
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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let’s review the key hedge fund action encompassing Cummins Inc. (NYSE:CMI).
Hedge fund activity in Cummins Inc. (NYSE:CMI)
At the end of the fourth quarter, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 15% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in CMI 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.
Among these funds, AQR Capital Management held the most valuable stake in Cummins Inc. (NYSE:CMI), which was worth $362.3 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $81.1 million worth of shares. Two Sigma Advisors, Millennium Management, 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 Arjuna Capital allocated the biggest weight to Cummins Inc. (NYSE:CMI), around 1.44% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, designating 0.81 percent of its 13F equity portfolio to CMI.
Consequently, specific money managers have jumped into Cummins Inc. (NYSE:CMI) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the most outsized position in Cummins Inc. (NYSE:CMI). Balyasny Asset Management had $38.9 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also made a $10.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Renaissance Technologies, Michael Gelband’s ExodusPoint Capital, and Qing Li’s Sciencast Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Cummins Inc. (NYSE:CMI) but similarly valued. We will take a look at PACCAR Inc (NASDAQ:PCAR), SBA Communications Corporation (NASDAQ:SBAC), Edison International (NYSE:EIX), and MPLX LP (NYSE:MPLX). All of these stocks’ market caps match CMI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PCAR | 36 | 216367 | 8 |
| SBAC | 45 | 1560377 | 4 |
| EIX | 34 | 1611946 | 6 |
| MPLX | 15 | 438138 | 0 |
| Average | 32.5 | 956707 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $957 million. That figure was $769 million in CMI’s case. SBA Communications Corporation (NASDAQ:SBAC) is the most popular stock in this table. On the other hand MPLX LP (NYSE:MPLX) is the least popular one with only 15 bullish hedge fund positions. Cummins Inc. (NYSE:CMI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds 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 beat the market by 5.5 percentage points. Unfortunately CMI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CMI were disappointed as the stock returned -28% 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 many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
