Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Cabot Corporation (NYSE:CBT).
Is Cabot Corporation (NYSE:CBT) ready to rally soon? Money managers are getting more bullish. The number of long hedge fund bets rose by 1 lately. Our calculations also showed that CBT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). CBT was in 18 hedge funds’ portfolios at the end of the third quarter of 2019. There were 17 hedge funds in our database with CBT holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 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.
Chuck Royce of Royce & Associates
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s analyze the fresh hedge fund action regarding Cabot Corporation (NYSE:CBT).
What does smart money think about Cabot Corporation (NYSE:CBT)?
At Q3’s end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CBT over the last 17 quarters. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Cabot Corporation (NYSE:CBT), with a stake worth $35.2 million reported as of the end of September. Trailing AQR Capital Management was First Pacific Advisors, which amassed a stake valued at $30.5 million. Royce & Associates, Two Sigma Advisors, and GLG Partners 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 Cruiser Capital Advisors allocated the biggest weight to Cabot Corporation (NYSE:CBT), around 3.14% of its 13F portfolio. First Pacific Advisors is also relatively very bullish on the stock, earmarking 0.29 percent of its 13F equity portfolio to CBT.
Now, key hedge funds were leading the bulls’ herd. GLG Partners, managed by Noam Gottesman, assembled the most valuable position in Cabot Corporation (NYSE:CBT). GLG Partners had $7.2 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also made a $2.4 million investment in the stock during the quarter. The other funds with brand new CBT positions are Matthew Hulsizer’s PEAK6 Capital Management, Joel Greenblatt’s Gotham Asset Management, and Paul Tudor Jones’s Tudor Investment Corp.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Cabot Corporation (NYSE:CBT) but similarly valued. We will take a look at Barnes Group Inc. (NYSE:B), Dorman Products Inc. (NASDAQ:DORM), Canada Goose Holdings Inc. (NYSE:GOOS), and National General Holdings Corp (NASDAQ:NGHC). This group of stocks’ market values match CBT’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| B | 13 | 24632 | -2 |
| DORM | 13 | 48985 | -1 |
| GOOS | 14 | 305816 | -4 |
| NGHC | 17 | 224476 | -1 |
| Average | 14.25 | 150977 | -2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $151 million. That figure was $121 million in CBT’s case. National General Holdings Corp (NASDAQ:NGHC) is the most popular stock in this table. On the other hand Barnes Group Inc. (NYSE:B) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Cabot Corporation (NYSE:CBT) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CBT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CBT were disappointed as the stock returned 4.5% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
