Is Cummins Inc. (CMI) A Good Stock To Buy?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Ackman’s recent Valeant losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Cummins Inc. (NYSE:CMI).

Cummins was in 32 hedge funds’ portfolios at the end of September. CMI has experienced a decrease in support from the world’s most elite money managers recently. There were 35 hedge funds in our database with CMI holdings at the end of the previous quarter. At the end of this article we will also compare CMI to other stocks, including CBS Corporation (NYSE:CBS), Williams Partners L.P. (NYSE:WPZ), and Zimmer Biomet Holdings Inc (NYSE:ZBH) to get a better sense of its popularity.

To most traders, hedge funds are seen as worthless, old investment vehicles of years past. While there are greater than 8000 funds with their doors open today, Our researchers choose to focus on the crème de la crème of this club, approximately 700 funds. Most estimates calculate that this group of people watch over most of the smart money’s total capital, and by paying attention to their unrivaled stock picks, Insider Monkey has figured out many investment strategies that have historically exceeded the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points per year for a decade in their back tests.

Keeping this in mind, let’s check out the recent action encompassing Cummins Inc. (NYSE:CMI).

How have hedgies been trading Cummins Inc. (NYSE:CMI)?

Heading into Q4, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Cliff Asness’ AQR Capital Management has the biggest position in Cummins Inc. (NYSE:CMI), worth close to $83.5 million, accounting for 0.2% of its total 13F portfolio. Coming in second is Joel Greenblatt of Gotham Asset Management, with a $59 million position; 0.6% of its 13F portfolio is allocated to the company. Other peers with similar optimism encompass David Harding’s Winton Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and Matthew Hulsizer’s PEAK6 Capital Management.

Seeing as Cummins Inc. (NYSE:CMI) has experienced falling interest from hedge fund managers, we can see that there was a specific group of money managers who were dropping their full holdings in the third quarter. Interestingly, Morris Mark’s Mark Asset Management said goodbye to the biggest stake of the 700 funds monitored by Insider Monkey, comprising close to $5.1 million in stock. Andy Redleaf’s fund, Whitebox Advisors, also said goodbye to its stock, about $4.3 million worth. These moves are important to note, as total hedge fund interest dropped by 3 funds in the third quarter.

Let’s now take a look at 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 CBS Corporation (NYSE:CBS), Williams Partners L.P. (NYSE:WPZ), Zimmer Biomet Holdings Inc (NYSE:ZBH), and Hartford Financial Services Group Inc (NYSE:HIG). All of these stocks’ market caps are closest to CMI’s market cap.

As you can see these stocks had an average of 44 hedge funds with bullish positions and the average amount invested in these stocks was $1.38 billion, higher than the $417 million in CMI’s case. CBS Corporation (NYSE:CBS) is the most popular stock in this table. On the other hand Williams Partners L.P. (NYSE:WPZ) is the least popular one with only 19 bullish hedge fund positions. Cummins Inc. (NYSE:CMI) 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 CBS might be a better candidate to consider a long position.