Were Hedge Funds Right About Souring On Canon Inc. (NYSE:CAJ)?

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Canon Inc. (NYSE:CAJ).

Canon Inc. (NYSE:CAJ) was in 6 hedge funds’ portfolios at the end of the fourth quarter of 2018. CAJ investors should be aware of a decrease in hedge fund sentiment recently. There were 8 hedge funds in our database with CAJ positions at the end of the previous quarter. Our calculations also showed that CAJ isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

We’re going to take a glance at the latest hedge fund action encompassing Canon Inc. (NYSE:CAJ).

What have hedge funds been doing with Canon Inc. (NYSE:CAJ)?

At the end of the fourth quarter, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. On the other hand, there were a total of 8 hedge funds with a bullish position in CAJ a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies, managed by Jim Simons, holds the number one position in Canon Inc. (NYSE:CAJ). Renaissance Technologies has a $41.9 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second most bullish fund manager is LMR Partners, led by Ben Levine, Andrew Manuel and Stefan Renold, holding a $17.9 million position; the fund has 0.9% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism contain D. E. Shaw’s D E Shaw, John Overdeck and David Siegel’s Two Sigma Advisors and Steve Cohen’s Point72 Asset Management.

Since Canon Inc. (NYSE:CAJ) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there were a few hedge funds that decided to sell off their positions entirely heading into Q3. Intriguingly, Israel Englander’s Millennium Management said goodbye to the biggest stake of the 700 funds followed by Insider Monkey, worth about $1.4 million in stock, and Michael Platt and William Reeves’s BlueCrest Capital Mgmt. was right behind this move, as the fund said goodbye to about $0.5 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 2 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks similar to Canon Inc. (NYSE:CAJ). These stocks are Eaton Corporation plc (NYSE:ETN), Sempra Energy (NYSE:SRE), Fiserv, Inc. (NASDAQ:FISV), and Canadian Natural Resources Limited (NYSE:CNQ). This group of stocks’ market caps resemble CAJ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $990 million. That figure was $85 million in CAJ’s case. Sempra Energy (NYSE:SRE) is the most popular stock in this table. On the other hand Canadian Natural Resources Limited (NYSE:CNQ) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Canon Inc. (NYSE:CAJ) is even less popular than CNQ. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Unfortunately CAJ wasn’t in this group. Hedge funds that bet on CAJ were disappointed as the stock returned 4.7% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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