Five Aerospace Stocks Hedge Funds Like for Q2

In a time when other industries are grappling with an uncertain economic environment and rising interest rates, the aerospace sector has been performing rather well. The strong quarterly numbers reported by several aerospace companies recently and the stable cash flows they boast is a testament to their ability to remain resilient to the continuous changes in the macro environment for the most part. While the aerospace sector does carry some intrinsic risks, which came to the fore recently when several aerospace stocks took a beating after the crash of a Cairo-bound EgyptAir jetliner, they pale in comparison to the risks carried by companies that operate in cyclical industries. Due to these advantages that the aerospace sector enjoys over others, several hedge funds are fond of these stocks. Taking into account their preference and the fact that aerospace stocks usually perform better than other sectors in a volatile environment like the one we’re experiencing this year, we are going to take a look at five leading aerospace stocks and analyze how popular they were among the hedge funds in our database going into the second quarter.

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Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5 AAR Corp. (NYSE:AIR)

 – Investors with long positions (as of March 31) : 21

 – Aggregate value of investors’ holdings (as of March 31): $66.25 million

Let’s start with AAR Corp. (NYSE:AIR), which saw its ownership among the funds that we track inch up by one during the first quarter, though the aggregate value of their holdings in it fall by 17% during the period. After suffering a significant decline during the third quarter of 2015, shares of the aviation products and services provider have been mostly trading in the $20-to-$25 range and have lost 7.15% of their value in 2016. AAR Corp. (NYSE:AIR) pays a quarterly dividend of $0.08 per share, which based on its current stock price, translates into an annual dividend yield of 1.23% For its fourth quarter of fiscal year 2016, analysts expect the company to report EPS of $0.47 on revenue of $452.40 million. For the same quarter of the previous fiscal year, AAR Corp. delivered EPS of $0.36 on revenue of $415.80 million. Malcolm Fairbairn‘s Ascend Capital was one of the hedge funds that initiated a stake in the company during the first quarter, purchasing 236,460 shares.

#4 KLX Inc (NASDAQ:KLXI)

 – Investors with long positions (as of March 31) : 22

 – Aggregate value of investors’ holdings (as of March 31): $462.32 million

KLX Inc (NASDAQ:KLXI) saw a marked decrease in its popularity among funds during the first quarter, with the number of funds in our system long the stock declining by five and the aggregate value of their holdings in the company slumping by $20.2 million. KLX Inc (NASDAQ:KLXI) became an independent publicly-traded company in December 2014, after it was spun off from B/E Aerospace Inc (NASDAQ:BEAV). Though its stock has appreciated by 6.44% this year, it is still trading down by over 28% since its debut. Analysts who track the stock feel that it has been unnecessarily beaten down due to the company’s marginal exposure to the energy sector. According to them, KLX is poised to benefit from long-term demand drivers which, coupled with the competitive advantages the company enjoys over its peers, will push KLX’s stock higher. On May 17, KLX announced that it had acquired Herndon Aerospace & Defense, LLC, a leading supply chain management and consumables hardware distributor. Michael Blitzer‘s Kingstown Capital Management upped its stake in KLX by 30% to 1.75 million shares during the first quarter.

We check in on hedgies’ three favorite aerospace stocks on the next page.

#3 Textron Inc. (NYSE:TXT)

 – Investors with long positions (as of March 31) : 30

 – Aggregate value of investors’ holdings (as of March 31): $570.83 million

Amid a 13.16% decline in Textron Inc. (NYSE:TXT)’s stock during the first quarter, the ownership of the company among funds tracked by Insider Monkey declined by two and the aggregate value of their holdings in it came down by $353.6 million. Hedge funds that sold off their entire stakes in Textron Inc. (NYSE:TXT) during that period included billionaire Andreas Halvorsen‘s Viking Global and Christopher Medlock James‘ Partner Fund Management. While Textron’s stock did manage to recoup some of the losses it incurred in the previous quarter early in April, it has been drifting lower since the company reported its first quarter financial results on April 20 and currently trades down by 10.34% year-to-date. Nevertheless, these declines have made the stock, currently trading at a trailing P/E ratio of 14.77, significantly cheaper compared to its peers in the aerospace industry, which trade at an average trailing P/E of 19.15.

#2 Boeing Co (NYSE:BA)

 – Investors with long positions (as of March 31) : 37

 – Aggregate value of investors’ holdings (as of March 31): $1.02 billion

Although the number of hedge funds in our system long Boeing Co (NYSE:BA) declined by five during the first quarter, the aggregate value of their holdings in the aerospace giant saw a marginal increase of 3.7% during the same period. Boeing Co (NYSE:BA)’s stock slumped on May 31, increasing its year-to-date loss to 13.84%, owing to the announcement made by the company last Friday that its program to supply KC-46 aerial refueling tankers to the U.S Air Force will be delayed. According to recent reports, the company is expected to win a $2.9 billion contract from the UK defense ministry for supplying 50 new Apache attack helicopters. On May 31, analysts at Goldman Sachs reiterated their ‘Sell’ rating on the stock while setting a price target of $101 on it, which represents a potential downside of almost 20% from the stock’s current trading price. Billionaire Cliff Asness‘ AQR Capital Management increased its stake in the company by 7% to 1.12 million shares during the first quarter.

#1 United Technologies Corporation (NYSE:UTX)

 – Investors with long positions (as of March 31) : 51

 – Aggregate value of investors’ holdings (as of March 31): $3.82 billion

United Technologies Corporation (NYSE:UTX) was the most popular aerospace stock among the funds tracked by Insider Monkey at the end of the first quarter. During the quarter, its ownership among those funds increased by seven and the aggregate value of their holdings in it jumped by 18.7%. Despite falling by over 5% since the time United Technologies Corporation (NYSE:UTX) came out with its first quarter results, shares of the company are still trading up by nearly 4% in 2016. The stock currently sports an average rating of ‘Overweight’ and an average price target of $112.50 from the 22 leading analysts and research firms on the Street who cover it. Having increased its stake in United Technologies by 2% to 8.37 million shares during the first quarter, billionaire Ken Fisher‘s Fisher Asset Management continued to remain the company’s largest shareholder as of March 31 among the 51 funds covered by Insider Monkey which owned it.

Disclosure: None