Did Hedge Funds Make The Right Call On Arconic Corporation (ARNC) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Arconic Corporation (NYSE:ARNC) and determine whether hedge funds skillfully traded this stock.

Arconic Corporation (NYSE:ARNC) investors should be aware of a decrease in support from the world’s most elite money managers lately. Our calculations also showed that ARNC isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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 58 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.

Joshua Friedman of Canyon Capital Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let’s take a look at the latest hedge fund action encompassing Arconic Corporation (NYSE:ARNC).

What have hedge funds been doing with Arconic Corporation (NYSE:ARNC)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -42% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ARNC over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Arconic Corporation (NYSE:ARNC) was held by Elliott Management, which reported holding $667.5 million worth of stock at the end of September. It was followed by Lone Pine Capital with a $331.8 million position. Other investors bullish on the company included First Pacific Advisors LLC, Kensico Capital, and D E Shaw. In terms of the portfolio weights assigned to each position Elliott Management allocated the biggest weight to Arconic Corporation (NYSE:ARNC), around 12.37% of its 13F portfolio. Kensico Capital is also relatively very bullish on the stock, dishing out 5.31 percent of its 13F equity portfolio to ARNC.

Seeing as Arconic Corporation (NYSE:ARNC) has experienced falling interest from the smart money, it’s easy to see that there exists a select few hedgies that elected to cut their positions entirely last quarter. Intriguingly, William B. Gray’s Orbis Investment Management said goodbye to the largest stake of all the hedgies tracked by Insider Monkey, totaling about $376.4 million in stock. Joshua Friedman and Mitchell Julis’s fund, Canyon Capital Advisors, also said goodbye to its stock, about $115.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 18 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Arconic Corporation (NYSE:ARNC) but similarly valued. We will take a look at Carlisle Companies, Inc. (NYSE:CSL), American Homes 4 Rent (NYSE:AMH), SEI Investments Company (NASDAQ:SEIC), and The Toro Company (NYSE:TTC). This group of stocks’ market values are similar to ARNC’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $343 million. That figure was $1740 million in ARNC’s case. SEI Investments Company (NASDAQ:SEIC) is the most popular stock in this table. On the other hand American Homes 4 Rent (NYSE:AMH) is the least popular one with only 21 bullish hedge fund positions. Arconic Corporation (NYSE:ARNC) is not the least popular stock in this group but hedge fund interest is still below average. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on ARNC as the stock returned 101.3% during the second quarter and outperformed the market by an even larger margin.

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