Is ITT Inc. (ITT) Going to Burn These Hedge Funds?

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards ITT Inc. (NYSE:ITT) , and what that likely means for the prospects of the company and its stock.

ITT Inc. (NYSE:ITT) was in 17 hedge funds’ portfolios at the end of the third quarter of 2016. ITT investors should pay attention to an increase in hedge fund interest in recent months. There were 14 hedge funds in our database with ITT positions at the end of the previous quarter. At the end of this article we will also compare ITT to other stocks including PS Business Parks Inc (NYSE:PSB), Brookdale Senior Living, Inc. (NYSE:BKD), and Cantel Medical Corp. (NYSE:CMN) to get a better sense of its popularity.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

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Hedge fund activity in ITT Inc. (NYSE:ITT)

Heading into the fourth quarter of 2016, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a 21% rise from the second quarter of 2016. On the other hand, there were a total of 21 hedge funds with a bullish position in ITT at the beginning of this year, so smart money ownership of the stock is still down this year. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Citadel Investment Group, led by Ken Griffin, holds the most valuable position in ITT Corp (NYSE:ITT). Citadel Investment Group has a $54 million position in the stock. Sitting at the No. 2 spot is AQR Capital Management, led by Cliff Asness, holding a $47.3 million position. Other hedge funds and institutional investors that are bullish contain Mario Gabelli’s GAMCO Investors, Paul Marshall and Ian Wace’s Marshall Wace LLP, and John Overdeck and David Siegel’s Two Sigma Advisors. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.

As one would reasonably expect, key money managers were leading the bulls’ herd. Renaissance Technologies, led by Jim Simons, assembled the most outsized position in ITT Corp (NYSE:ITT). Renaissance Technologies had $7.1 million invested in the company at the end of the quarter. Wojciech Uzdelewicz’s Espalier Global Management also made a $3.6 million investment in the stock during the quarter. The other funds with brand new ITT positions are Gregg Moskowitz’s Interval Partners, Matthew Tewksbury’s Stevens Capital Management, and Michael Platt and William Reeves’ BlueCrest Capital Mgmt..

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as ITT Corp (NYSE:ITT) but similarly valued. These stocks are PS Business Parks Inc (NYSE:PSB), Brookdale Senior Living, Inc. (NYSE:BKD), Cantel Medical Corp. (NYSE:CMN), and Catalent Inc (NYSE:CTLT). This group of stocks’ market valuations are closest to ITT’s market valuation.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $340 million. That figure was $181 million in ITT’s case. Brookdale Senior Living, Inc. (NYSE:BKD) is the most popular stock in this table. On the other hand PS Business Parks Inc (NYSE:PSB) is the least popular one with only 7 bullish hedge fund positions. ITT Corp (NYSE:ITT) 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 BKD might be a better candidate to consider taking a long position in.

Disclosure: None