How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Kellogg Company (NYSE:K).
Hedge fund interest in Kellogg Company (NYSE:K) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that K isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). At the end of this article we will also compare K to other stocks including Paycom Software Inc (NYSE:PAYC), Western Digital Corporation (NASDAQ:WDC), and Royal Caribbean Cruises Ltd. (NYSE:RCL) to get a better sense of its popularity.
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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
David Harding of Winton Capital Management
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we’re going to check out the latest hedge fund action regarding Kellogg Company (NYSE:K).
Do Hedge Funds Think K Is A Good Stock To Buy Now?
At second quarter’s end, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in K over the last 24 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Alkeon Capital Management was the largest shareholder of Kellogg Company (NYSE:K), with a stake worth $128.7 million reported as of the end of June. Trailing Alkeon Capital Management was Arrowstreet Capital, which amassed a stake valued at $113.6 million. Renaissance Technologies, Millennium Management, and Bridgewater Associates 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 Factorial Partners allocated the biggest weight to Kellogg Company (NYSE:K), around 1.91% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, designating 0.54 percent of its 13F equity portfolio to K.
Judging by the fact that Kellogg Company (NYSE:K) has faced falling interest from the smart money, it’s safe to say that there were a few hedge funds who sold off their positions entirely in the second quarter. Intriguingly, Clint Carlson’s Carlson Capital sold off the largest stake of the 750 funds tracked by Insider Monkey, comprising an estimated $4.9 million in stock. John Overdeck and David Siegel’s fund, Two Sigma Advisors, also dumped its stock, about $3.7 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Kellogg Company (NYSE:K) but similarly valued. We will take a look at Paycom Software Inc (NYSE:PAYC), Western Digital Corporation (NASDAQ:WDC), Royal Caribbean Cruises Ltd. (NYSE:RCL), Dover Corporation (NYSE:DOV), Caesars Entertainment Inc. (NASDAQ:CZR), Xylem Inc (NYSE:XYL), and Fox Corporation (NASDAQ:FOXA). All of these stocks’ market caps are closest to K’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PAYC | 39 | 1149714 | -7 |
| WDC | 57 | 2114351 | -1 |
| RCL | 42 | 596573 | 0 |
| DOV | 29 | 700034 | 3 |
| CZR | 73 | 1839888 | -3 |
| XYL | 23 | 931677 | 0 |
| FOXA | 35 | 441270 | -3 |
| Average | 42.6 | 1110501 | -1.6 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 42.6 hedge funds with bullish positions and the average amount invested in these stocks was $1111 million. That figure was $483 million in K’s case. Caesars Entertainment Inc. (NASDAQ:CZR) is the most popular stock in this table. On the other hand Xylem Inc (NYSE:XYL) is the least popular one with only 23 bullish hedge fund positions. Kellogg Company (NYSE:K) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for K is 38.6. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and surpassed the market again by 4.5 percentage points. Unfortunately K wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); K investors were disappointed as the stock returned -3.1% since the end of June (through 10/15) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.
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Disclosure: None. This article was originally published at Insider Monkey.
