Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Cummins Inc. (NYSE:CMI)? The smart money sentiment can provide an answer to this question.
Cummins Inc. (NYSE:CMI) investors should be aware of an increase in hedge fund sentiment lately. Cummins Inc. (NYSE:CMI) was in 45 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 49. There were 37 hedge funds in our database with CMI holdings at the end of March. Our calculations also showed that CMI isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.
Noam Gottesman of GLG Partners
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, artificial intelligence is one of the fastest-growing industries right now, so we are checking out stock pitches like this emerging AI stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we’re going to take a look at the key hedge fund action encompassing Cummins Inc. (NYSE:CMI).
Do Hedge Funds Think CMI Is A Good Stock To Buy Now?
At second quarter’s end, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CMI over the last 24 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Noam Gottesman’s GLG Partners has the biggest position in Cummins Inc. (NYSE:CMI), worth close to $253.2 million, amounting to 0.9% of its total 13F portfolio. The second largest stake is held by AQR Capital Management, led by Cliff Asness, holding a $230.2 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish include Israel Englander’s Millennium Management, Stanley Druckenmiller’s Duquesne Capital and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Socorro Asset Management allocated the biggest weight to Cummins Inc. (NYSE:CMI), around 4.34% of its 13F portfolio. Duquesne Capital is also relatively very bullish on the stock, designating 2.27 percent of its 13F equity portfolio to CMI.
Consequently, key money managers have jumped into Cummins Inc. (NYSE:CMI) headfirst. Renaissance Technologies, established the largest position in Cummins Inc. (NYSE:CMI). Renaissance Technologies had $49.7 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital also initiated a $34.4 million position during the quarter. The other funds with brand new CMI positions are Anand Parekh’s Alyeska Investment Group, Robert Bishop’s Impala Asset Management, and Ray Dalio’s Bridgewater Associates.
Let’s check out hedge fund activity in other stocks similar to Cummins Inc. (NYSE:CMI). These stocks are Xilinx, Inc. (NASDAQ:XLNX), TransDigm Group Incorporated (NYSE:TDG), Xcel Energy Inc (NYSE:XEL), Brown-Forman Corporation (NYSE:BF), Alcon Inc. (NYSE:ALC), Republic Services, Inc. (NYSE:RSG), and Otis Worldwide Corporation (NYSE:OTIS). This group of stocks’ market valuations resemble CMI’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| XLNX | 59 | 4162249 | 2 |
| TDG | 57 | 7351832 | -5 |
| XEL | 22 | 235410 | 4 |
| BF | 31 | 1667783 | -4 |
| ALC | 22 | 727825 | -1 |
| RSG | 34 | 1289299 | -2 |
| OTIS | 45 | 2406679 | -7 |
| Average | 38.6 | 2548725 | -1.9 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.6 hedge funds with bullish positions and the average amount invested in these stocks was $2549 million. That figure was $1102 million in CMI’s case. Xilinx, Inc. (NASDAQ:XLNX) is the most popular stock in this table. On the other hand Xcel Energy Inc (NYSE:XEL) is the least popular one with only 22 bullish hedge fund positions. Cummins Inc. (NYSE:CMI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CMI is 68.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.9% in 2021 through October 1st and beat the market again by 5.6 percentage points. Unfortunately CMI wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on CMI were disappointed as the stock returned -5.9% since the end of June (through 10/1) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.
