Hedge Funds Dipping Their Toes Back Into Caterpillar Inc. (CAT)

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Caterpillar Inc. (NYSE:CAT) based on that data and determine whether they were really smart about the stock.

Caterpillar Inc. (NYSE:CAT) was in 39 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 63. CAT investors should be aware of an increase in hedge fund sentiment of late. There were 34 hedge funds in our database with CAT holdings at the end of March. Our calculations also showed that CAT isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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 read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind let’s take a gander at the fresh hedge fund action regarding Caterpillar Inc. (NYSE:CAT).

How have hedgies been trading Caterpillar Inc. (NYSE:CAT)?

Heading into the third quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from the first quarter of 2020. By comparison, 45 hedge funds held shares or bullish call options in CAT a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Among these funds, Bill & Melinda Gates Foundation Trust held the most valuable stake in Caterpillar Inc. (NYSE:CAT), which was worth $1424.5 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $733.6 million worth of shares. Citadel Investment Group, Citadel Investment Group, and AQR 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 Axel Capital Management allocated the biggest weight to Caterpillar Inc. (NYSE:CAT), around 14.66% of its 13F portfolio. Bill & Melinda Gates Foundation Trust is also relatively very bullish on the stock, dishing out 7.97 percent of its 13F equity portfolio to CAT.

As industrywide interest jumped, key money managers have jumped into Caterpillar Inc. (NYSE:CAT) headfirst. Citadel Investment Group, managed by Ken Griffin, assembled the largest position in Caterpillar Inc. (NYSE:CAT). Citadel Investment Group had $130 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $53.9 million position during the quarter. The other funds with new positions in the stock are Anand Parekh’s Alyeska Investment Group, Dmitry Balyasny’s Balyasny Asset Management, and Anna Nikolayevsky’s Axel Capital Management.

Let’s now take a look at hedge fund activity in other stocks similar to Caterpillar Inc. (NYSE:CAT). We will take a look at Dominion Energy Inc. (NYSE:D), Goldman Sachs Group, Inc. (NYSE:GS), The Estee Lauder Companies Inc (NYSE:EL), The Blackstone Group Inc. (NYSE:BX), Stryker Corporation (NYSE:SYK), Intuitive Surgical, Inc. (NASDAQ:ISRG), and Anthem Inc (NYSE:ANTM). All of these stocks’ market caps match CAT’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 51 hedge funds with bullish positions and the average amount invested in these stocks was $1857 million. That figure was $2668 million in CAT’s case. Goldman Sachs Group, Inc. (NYSE:GS) is the most popular stock in this table. On the other hand Dominion Energy Inc. (NYSE:D) is the least popular one with only 33 bullish hedge fund positions. Caterpillar Inc. (NYSE:CAT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CAT is 36.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately CAT wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CAT investors were disappointed as the stock returned 13.3% since Q2 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.