Difficult days ahead for Fiat Chrysler Automobiles NV (NYSE:FCAU) and Deere & Company (NYSE:DE) as both auto-makers are negotiating new deals with the United Automobile Workers (UAW). Having reached a tentative deal with the union two weeks ago, Fiat Chrysler Automobiles saw its workers reject the deal for the first time in 33 years, despite the union leadership having claimed the deal was a fair bargain. Deere & Company announced today that it has reached a tentative deal with the UAW and it’s now up to members to vote for or against the new six-year agreement. No details of the agreement were made public. Hedge fund bullishness towards both stocks has cooled down a bit during the 2015 second quarter.
But why do we track hedge fund activity? From one point of view we can argue that hedge funds are consistently underperforming when it comes to net returns over the last three years, when compared to the S&P 500. But that doesn’t mean that we should completely neglect their activity. There are various reasons behind the low hedge fund returns. Our research indicated that hedge funds’ long positions actually beat the market. In our back-tests covering the 1999-2012 period hedge funds’ top small-cap stocks edged the S&P 500 index by double digits annually. The 15 most popular small-cap stock picks among hedge funds also bested passive index funds by around 60 percentage points over the 36 month period beginning from September 2012 (read the details here).
UAW members employed by Fiat Chrysler Automobiles NV (NYSE:FCAU) were not pleased with the wage structure of the agreement, claiming the deal does not include a clear plan to end the two-tier wage structure, in which workers that have joined Fiat Chrysler Automobiles after 2007 receive lower wages than veteran workers. They also claim that these workers would be unable to reach the top wage of $28.50 per hour under the terms of the new agreement. The United Automobile Workers union has allowed new employees to be paid lower wages in 2007, when US automakers were going through a difficult financial spell, however the agreement did not stipulate a maximum number of second-tier workers and when these measures would be abolished, terms that were expected to be included in the new deal. Workers are also unhappy about the company being allowed to shift production of some vehicles to low-wage Mexico, as well as certain aspects of healthcare benefits.
UAW leadership has found itself in hot water as discontent among members has been increasing for some time. “It’s really clear that there were three different parties in this round of negotiations: The company, the union leadership and the membership,” said Kristin Dziczek, director of the labor and industry group for the Center for Automotive Research. As United Automobile Workers also represents approximately 10,000 Deere & Company (NYSE:DE) employees, the rejection of the deal could put the union leadership under more pressure, as it prepares for negotiations with General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F).
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The popularity of Fiat Chrysler Automobiles NV (NYSE:FCAU) has somewhat decreased during the second quarter, with the number of hedge funds with a long position decreasing to 35 from 40. Their cumulative investment carried an estimated value of $1.33 billion, down by 10.8% during the quarter, and accounted for 7.2% of the company’s common stock. Cliff Asness dumped more than half of his stake in Fiat Chrysler Automobiles, leaving his fund, AQR Capital Management, with 4.33 million shares. Kevin D. Eng, the manager of Columbus Hill Capital Management, has also chosen to reduce his exposure to the auto maker, slashing his position by 53% to a little over 1.3 million shares. Steven Cohen, on the other hand, is bullish on the stock, adding a further 1.25 million shares to his previous stake during the second quarter. His fund, Point72 Asset Management, has reported ownership of 1.35 million shares in its latest 13F filing.
On the other hand, hedge funds have mixed sentiments towards Deere & Company, with the number of long positions among the funds that we follow having decreased to 31 at the end of June from 34 at the end of March, while the value of their investment rose by 23.5% to $3.43 billion. Their aggregate holdings account for roughly 10.6% of the company’s total number of shares outstanding. Warren Buffett is still a fan of Deere & Company (NYSE:DE), with Berkshire Hathaway having reported ownership of 17.3 million shares in its latest quarterly filing. David Blood and Al Gore, managers of Generation Investment Management, have stepped up their interest in the company, boosting their stake by 78% during the second quarter to amass 4.3 million shares. Mario Gabelli, on the other hand, has decided to reduce his stake by 7% to 1.04 million shares, according to GAMCO Investors’ latest 13F filing.
Disclosure: none.
