Rockwell Automation Inc. (ROK): Are Hedge Funds Right About This Stock?

Is Rockwell Automation Inc. (NYSE:ROK) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Rockwell Automation Inc. (NYSE:ROK) worth your attention right now? The best stock pickers are becoming less hopeful. The number of bullish hedge fund bets dropped by 5 recently. Our calculations also showed that ROK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). ROK was in 26 hedge funds’ portfolios at the end of the third quarter of 2019. There were 31 hedge funds in our database with ROK positions at the end of the previous quarter.

Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Mario Gabelli of GAMCO Investors

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a glance at the new hedge fund action encompassing Rockwell Automation Inc. (NYSE:ROK).

How are hedge funds trading Rockwell Automation Inc. (NYSE:ROK)?

At the end of the third quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the second quarter of 2019. By comparison, 28 hedge funds held shares or bullish call options in ROK a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

The largest stake in Rockwell Automation Inc. (NYSE:ROK) was held by Citadel Investment Group, which reported holding $79.7 million worth of stock at the end of September. It was followed by Millennium Management with a $57.5 million position. Other investors bullish on the company included Nitorum Capital, GAMCO Investors, and Impax Asset Management. In terms of the portfolio weights assigned to each position Albar Capital allocated the biggest weight to Rockwell Automation Inc. (NYSE:ROK), around 3.46% of its portfolio. Nitorum Capital is also relatively very bullish on the stock, designating 2.68 percent of its 13F equity portfolio to ROK.

Since Rockwell Automation Inc. (NYSE:ROK) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of hedge funds that slashed their entire stakes by the end of the third quarter. It’s worth mentioning that Dmitry Balyasny’s Balyasny Asset Management cut the largest stake of all the hedgies tracked by Insider Monkey, worth an estimated $33.3 million in stock, and Ray Dalio’s Bridgewater Associates was right behind this move, as the fund dumped about $13.3 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 5 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks similar to Rockwell Automation Inc. (NYSE:ROK). We will take a look at ORIX Corporation (NYSE:IX), Ameriprise Financial, Inc. (NYSE:AMP), The Clorox Company (NYSE:CLX), and Cincinnati Financial Corporation (NASDAQ:CINF). This group of stocks’ market valuations are similar to ROK’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $671 million. That figure was $469 million in ROK’s case. The Clorox Company (NYSE:CLX) is the most popular stock in this table. On the other hand ORIX Corporation (NYSE:IX) is the least popular one with only 4 bullish hedge fund positions. Rockwell Automation Inc. (NYSE:ROK) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on ROK as the stock returned 19.5% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Disclosure: None. This article was originally published at Insider Monkey.