Is Cato Corp (CATO) A Good Stock To Buy?

Concerns over a shift in Fed’s easy monetary policy have hit several hedge funds hard during the third quarter. A number of sectors are in correction territory. More importantly, Russell 2000 ETF (IWM) underperformed the larger S&P 500 ETF (SPY) by more than 14 percentage points between June 25, 2015 and October 30, 2015. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were paring back their overall exposure and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Cato Corp (NYSE:CATO).

Cato Corp (NYSE:CATO) has experienced a decrease in hedge fund sentiment in recent months. CATO was in 11 hedge funds’ portfolios at the end of the third quarter of 2015. There were 12 hedge funds in our database with CATO holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as The Andersons, Inc. (NASDAQ:ANDE), Stewart Information Services Corp (NYSE:STC), and Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI) to gather more data points.

At the moment there are a large number of metrics market participants can use to value publicly traded companies. A couple of the best metrics are hedge fund and insider trading signals. We have shown that, historically, those who follow the best picks of the best hedge fund managers can outperform their index-focused peers by a very impressive margin (see the details here).

Keeping this in mind, let’s take a peek at the new action regarding Cato Corp (NYSE:CATO).

What have hedge funds been doing with Cato Corp (NYSE:CATO)?

Heading into Q4, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the second quarter. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Chuck Royce’s Royce & Associates has the most valuable position in Cato Corp (NYSE:CATO), worth close to $80.8 million, corresponding to 0.4% of its total 13F portfolio. The second most bullish fund manager is Joel Greenblatt of Gotham Asset Management, with a $9.4 million position; 0.1% of its 13F portfolio is allocated to the company. Some other professional money managers with similar optimism include Cliff Asness’s AQR Capital Management, Jim Simons’s Renaissance Technologies and D E Shaw.

Since Cato Corp (NYSE:CATO) has experienced a declination in interest from the aggregate hedge fund industry, logic holds that there were a few money managers that decided to sell off their entire stakes by the end of the third quarter. At the top of the heap, Peter Muller’s PDT Partners dropped the largest position of all the hedgies followed by Insider Monkey, worth close to $0.5 million in stock. Thomas Bailard’s fund, Bailard Inc, also cut its stock, about $0.3 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Cato Corp (NYSE:CATO). These stocks are The Andersons, Inc. (NASDAQ:ANDE), Stewart Information Services Corp (NYSE:STC), Ollie’s Bargain Outlet Holdings Inc (NASDAQ:OLLI), and A. Schulman Inc (NASDAQ:SHLM). This group of stocks’ market values are closest to CATO’s market value.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $94 million. That figure was $109 million in CATO’s case. A. Schulman Inc (NASDAQ:SHLM) is the most popular stock in this table. On the other hand The Andersons, Inc. (NASDAQ:ANDE) is the least popular one with only 8 bullish hedge fund positions. Cato Corp (NYSE:CATO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard SHLM might be a better candidate to consider a long position.