is-cme-group-inc-(cme)-a-good-stock-to-buy?

Is CME Group Inc (CME) A Good Stock To Buy?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded CME Group Inc (NASDAQ: CME) and determine whether the smart money was really smart about this stock.

Is CME Group Inc (NASDAQ: CME) a sound stock to buy now? Some hedge funds were in a bearish mood. The number of bullish hedge fund bets went down by 2 recently. CME Group Inc (NASDAQ: CME) was in 60 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 62. Our calculations also showed that CME 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). There were 62 hedge funds in our database with CME positions at the end of the first quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.

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 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 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 stocks that are in our short portfolio.

AQR CAPITAL MANAGEMENT

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let’s take a glance at the new hedge fund action surrounding CME Group Inc (NASDAQ: CME).

What have hedge funds been doing with CME Group Inc (NASDAQ:CME)?

At second quarter’s end, a total of 60 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CME over the last 20 quarters. With hedgies’ sentiment swirling, there exists a select group of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

More specifically, Cantillon Capital Management was the largest shareholder of CME Group Inc (NASDAQ:CME), with a stake worth $301.2 million reported as of the end of September. Trailing Cantillon Capital Management was D E Shaw, which amassed a stake valued at $268.8 million. GuardCap Asset Management, Renaissance Technologies, and AQR Capital 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 VGI Partners allocated the biggest weight to CME Group Inc (NASDAQ:CME), around 11.72% of its 13F portfolio. GuardCap Asset Management is also relatively very bullish on the stock, dishing out 9.91 percent of its 13F equity portfolio to CME.

Since CME Group Inc (NASDAQ:CME) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there were a few hedge funds who were dropping their positions entirely last quarter. Intriguingly, Brandon Haley’s Holocene Advisors sold off the biggest stake of all the hedgies watched by Insider Monkey, valued at an estimated $19.2 million in stock. James Morrow’s fund, Callodine Capital Management, also dumped its stock, about $13 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 2 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as CME Group Inc (NASDAQ:CME) but similarly valued. These stocks are Micron Technology, Inc. (NASDAQ: MU), Chubb Limited (NYSE: CB), Ecolab Inc. (NYSE: ECL), Takeda Pharmaceutical Company Limited (NYSE: TAK), U.S. Bancorp (NYSE: USB), Applied Materials, Inc. (NASDAQ: AMAT), and Illinois Tool Works Inc. (NYSE: ITW). This group of stocks’ market caps match CME’s market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MU,84,4285777,-10 CB,40,1288157,7 ECL,46,2099678,8 TAK,18,790266,-4 USB,48,6299135,-3 AMAT,58,2461809,2 ITW,35,565341,1 Average,47,2541452,0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 47 hedge funds with bullish positions and the average amount invested in these stocks was $2541 million. That figure was $2337 million in CME’s case. Micron Technology, Inc. (NASDAQ: MU) is the most popular stock in this table. On the other hand Takeda Pharmaceutical Company Limited (NYSE: TAK) is the least popular one with only 18 bullish hedge fund positions. CME Group Inc (NASDAQ:CME) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CME is 63.9. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 28.2% in 2020 through August 24th but beat the market by 20.6 percentage points. Unfortunately CME wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CME were disappointed as the stock returned 7.8% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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