Were These Hedge Funds Right About Warming Up To Illinois Tool Works Inc. (ITW)?

In this article we will check out the progression of hedge fund sentiment towards Illinois Tool Works Inc. (NYSE:ITW) and determine whether it is a good investment 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 Illinois Tool Works Inc. (NYSE:ITW) ready to rally soon? Investors who are in the know were getting more bullish. The number of long hedge fund bets moved up by 1 lately. Illinois Tool Works Inc. (NYSE:ITW) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 38. Our calculations also showed that ITW isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind let’s take a peek at the fresh hedge fund action encompassing Illinois Tool Works Inc. (NYSE:ITW).

What have hedge funds been doing with Illinois Tool Works Inc. (NYSE:ITW)?

At Q2’s end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ITW over the last 20 quarters. With the smart money’s capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in Illinois Tool Works Inc. (NYSE:ITW), which was worth $94.1 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $81.2 million worth of shares. Balyasny Asset Management, Arrowstreet Capital, and Markel Gayner Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Jade Capital Advisors allocated the biggest weight to Illinois Tool Works Inc. (NYSE:ITW), around 5.58% of its 13F portfolio. Arjuna Capital is also relatively very bullish on the stock, setting aside 2 percent of its 13F equity portfolio to ITW.

Now, some big names have been driving this bullishness. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the most outsized position in Illinois Tool Works Inc. (NYSE:ITW). Balyasny Asset Management had $61.2 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $42.8 million position during the quarter. The other funds with brand new ITW positions are Israel Englander’s Millennium Management, Robert Vincent McHugh’s Jade Capital Advisors, and Donald Sussman’s Paloma Partners.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Illinois Tool Works Inc. (NYSE:ITW) but similarly valued. We will take a look at America Movil SAB de CV (NYSE:AMX), The Southern Company (NYSE:SO), Illumina, Inc. (NASDAQ:ILMN), Marsh & McLennan Companies, Inc. (NYSE:MMC), Uber Technologies, Inc. (NYSE:UBER), Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR), and CSX Corporation (NYSE:CSX). This group of stocks’ market valuations match ITW’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.4 hedge funds with bullish positions and the average amount invested in these stocks was $1655 million. That figure was $565 million in ITW’s case. Uber Technologies, Inc. (NYSE:UBER) is the most popular stock in this table. On the other hand America Movil SAB de CV (NYSE:AMX) is the least popular one with only 11 bullish hedge fund positions. Illinois Tool Works Inc. (NYSE:ITW) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ITW is 48.1. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on ITW as the stock returned 12.7% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.

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