We recently compiled a list of the Diamond Hill Capital’s Top 10 Stock Picks. In this article, we are going to take a look at where Caterpillar Inc. (NYSE:CAT) stands against Diamond Hill Capital’s other stock picks.
Heather Brilliant’s Diamond Hill Capital is a Columbus, Ohio-based investment management firm founded in 1997 by Ric Dillon, who managed the company until 2019. Mr. Dillon and several members of his team broke off to form VELA Investment Management that year, which led to the addition of Heather Brilliant to the CEO position at Diamond Hill.
Ms. Brilliant earned an MBA from the University of Chicago Booth School of Business, as well as a degree in economics from Northwestern University. She has since accrued more than two decades of experience in the domestic and international investment markets, including nearly 14 years at Morningstar that culminated in her managing the company’s Australasia division, as well as a successful run as CEO, Americas at First State Investments.
Ms. Brilliant has taken major strides to refocus Diamond Hill in her five years at the helm of the company, closing its private asset management division and several of its investment strategies that didn’t align with the fund’s core value investing ethos. Meanwhile, the fund has bulked up its focus on long-term value and fixed income investing by reworking and growing its teams in those disciplines, and adjusting its operational processes and expectations.
In a November interview on Bloomberg’s The Close, Ms. Brilliant noted that in the current environment of earnings volatility, her team is focused on uncovering high-quality businesses trading at fair valuations. When asked about her team’s approach to investing in broader sectors experiencing secular tailwinds, specifically the utilities sector, Ms. Brilliant said that while the “story” of power-hungry AI is a good one, she was unconvinced by the valuations in the space, noting that she instead likes some of the pricing trends in the insurance space.
That was evidenced by the fund’s large-cap strategy (Q3 investor letter here) adding two big insurance names to its portfolio in Q3, a quarter in which the fund returned 7.84% net of fees, beating the benchmark Russell 1000 Index by 1.76 percentage points. That lifted its year-to-date returns to 14.7% net of fees, ahead of last year’s 13.7% return. The large-cap strategy returned 25.7% in 2021 and 32.2% in 2019.
The Diamond Hill Small Cap Fund (Q3 2024 investor letter here) also added some insurance names to its portfolio during Q3 and rattled off a solid quarter of 8.43% gains, though that trailed the benchmark Russell 2000 Index by 84 basis points. The fund has returned just under 10% annually since inception, beating the Russell 2000 by nearly 200 basis points.
There’s been relatively little volatility in Diamond Hill’s overall sector allocations over the past year, with finance stocks continuing to account for nearly a quarter of the fund’s 13F portfolio, which was valued at $24.7 billion on September 30, up from $23.4 billion at the end of June. Consumer discretionary, healthcare, and industrials stocks were next at 15.9%, 14.1%, and 13.7% exposure respectively. Tech stocks rounded out the fund’s top 5 sectors at 8.6% exposure.
Our Methodology
The following data is gathered from Diamond Hill Capital’s latest 13F filing with the SEC.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here). That’s why you should pay close attention to this important indicator.
Note: All hedge fund data is based on the exclusive group of 900+ active funds tracked by Insider Monkey that filed 13Fs for the Q3 2024 reporting period.
A construction crew operating a hydraulic shovel during a nighttime project.
Caterpillar Inc. (NYSE:CAT)
Value of Diamond Hill Capital’s 13F Position (9/30/2024): $528 million
Number of Hedge Fund Shareholders (9/30/2024): 52
Hedge funds don’t seem convinced by Caterpillar Inc. (NYSE:CAT)’s strong market performance this year, as their ownership of the stock has remained relatively flat despite CAT shares rising by 33% in 2024. Diamond Hill has also trimmed its own position in the heavy machinery manufacturer by about 187,000 shares in 2024, though it remains the fund’s eighth-largest position. Ken Fisher’s Fisher Asset Management is the largest Caterpillar shareholder among the funds tracked by Insider Monkey.
While Caterpillar Inc. (NYSE:CAT) is often thought of as a stodgy heavy machinery manufacturer, the company does have some interesting exposure to AI as a supplier of backup power for data centers, which JP Morgan noted in a recent price target raise on the stock (to $515 from $500). Citi also likes Caterpillar long-term ($460 price target), but has the stock on a 90-day negative catalyst watch due to the risk of the company missing estimates in the near term. The firm believes that recent Fed cuts and stronger commodity prices will benefit Caterpillar in the long run, but that the market has jumped the gun on just how quickly those benefits will manifest on Caterpillar’s balance sheet.
The Diamond Hill Large Cap Concentrated Strategy shared the latest concerns regarding Caterpillar Inc. (NYSE:CAT)’s near-term outlook in its Q2 2024 investor letter:
“Other bottom Q2 contributors included Caterpillar Inc. (NYSE:CAT) and Home Depot. Shares of heavy construction machinery manufacturer Caterpillar fell as dealer inventories have declined and the market wrestles with concerns construction activity may be decelerating.”
Overall CAT ranks 8th on our list of Diamond Hill Capital’s stock picks. While we acknowledge the potential of CAT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CAT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
