Should You Avoid The Cato Corporation (CATO)?

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like The Cato Corporation (NYSE:CATO).

Is The Cato Corporation (NYSE:CATO) going to take off soon? Investors who are in the know are reducing their bets on the stock. The number of bullish hedge fund positions were trimmed by 4 in recent months. Our calculations also showed that CATO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). CATO was in 14 hedge funds’ portfolios at the end of the third quarter of 2019. There were 18 hedge funds in our database with CATO holdings at the end of the previous quarter.

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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. Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Cliff Asness of AQR Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the recent hedge fund action surrounding The Cato Corporation (NYSE:CATO).

What does smart money think about The Cato Corporation (NYSE:CATO)?

Heading into the fourth quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CATO over the last 17 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, AQR Capital Management, managed by Cliff Asness, holds the number one position in The Cato Corporation (NYSE:CATO). AQR Capital Management has a $7.5 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $5.9 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other peers that hold long positions consist of Renaissance Technologies, Ken Griffin’s Citadel Investment Group and David E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Ellington allocated the biggest weight to The Cato Corporation (NYSE:CATO), around 0.04% of its 13F portfolio. Tudor Investment Corp is also relatively very bullish on the stock, designating 0.03 percent of its 13F equity portfolio to CATO.

Because The Cato Corporation (NYSE:CATO) has faced falling interest from hedge fund managers, logic holds that there lies a certain “tier” of hedge funds that slashed their entire stakes last quarter. At the top of the heap, Michael Gelband’s ExodusPoint Capital said goodbye to the largest stake of the “upper crust” of funds watched by Insider Monkey, worth about $0.4 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund sold off about $0.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as The Cato Corporation (NYSE:CATO) but similarly valued. These stocks are Newtek Business Services, Inc (NASDAQ:NEWT), Oportun Financial Corporation (NASDAQ:OPRT), Gulfport Energy Corporation (NASDAQ:GPOR), and Intrepid Potash, Inc. (NYSE:IPI). This group of stocks’ market valuations are closest to CATO’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $31 million. That figure was $37 million in CATO’s case. Gulfport Energy Corporation (NASDAQ:GPOR) is the most popular stock in this table. On the other hand Newtek Business Services, Inc (NASDAQ:NEWT) is the least popular one with only 6 bullish hedge fund positions. The Cato Corporation (NYSE:CATO) 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 CATO, though not to the same extent, as the stock returned 8.2% during the first two months of the fourth quarter and outperformed the market as well.

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