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 Axalta Coating Systems Ltd (NYSE:AXTA) and determine whether hedge funds had an edge regarding this stock.
Axalta Coating Systems Ltd (NYSE:AXTA) investors should pay attention to a decrease in hedge fund sentiment of late. Axalta Coating Systems Ltd (NYSE:AXTA) was in 47 hedge funds’ portfolios at the end of June. The all time high for this statistics is 60. There were 49 hedge funds in our database with AXTA positions at the end of the first quarter. Our calculations also showed that AXTA 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).
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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ricky Sandler of Eminence Capital
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. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we’re going to take a glance at the key hedge fund action encompassing Axalta Coating Systems Ltd (NYSE:AXTA).
What have hedge funds been doing with Axalta Coating Systems Ltd (NYSE:AXTA)?
At Q2’s end, a total of 47 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards AXTA over the last 20 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.
The largest stake in Axalta Coating Systems Ltd (NYSE:AXTA) was held by Berkshire Hathaway, which reported holding $542.8 million worth of stock at the end of September. It was followed by Rivulet Capital with a $130.3 million position. Other investors bullish on the company included Citadel Investment Group, Diamond Hill Capital, and Eminence Capital. In terms of the portfolio weights assigned to each position Atlantic Investment Management allocated the biggest weight to Axalta Coating Systems Ltd (NYSE:AXTA), around 13.1% of its 13F portfolio. Rivulet Capital is also relatively very bullish on the stock, earmarking 8.49 percent of its 13F equity portfolio to AXTA.
Judging by the fact that Axalta Coating Systems Ltd (NYSE:AXTA) has witnessed declining sentiment from the smart money, we can see that there is a sect of hedgies who were dropping their entire stakes heading into Q3. It’s worth mentioning that Jeffrey Gates’s Gates Capital Management dumped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $42 million in stock. Philip Hilal’s fund, Clearfield Capital, also sold off its stock, about $12.1 million worth. These moves are interesting, as aggregate hedge fund interest fell by 2 funds heading into Q3.
Let’s now review hedge fund activity in other stocks similar to Axalta Coating Systems Ltd (NYSE:AXTA). These stocks are Nielsen Holdings plc (NYSE:NLSN), Comerica Incorporated (NYSE:CMA), PLDT Inc. (NYSE:PHI), Ralph Lauren Corporation (NYSE:RL), Ares Management Corp (NYSE:ARES), Churchill Downs Incorporated (NASDAQ:CHDN), and Sonoco Products Company (NYSE:SON). All of these stocks’ market caps resemble AXTA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NLSN | 31 | 1177115 | -2 |
| CMA | 36 | 423590 | 3 |
| PHI | 5 | 85702 | -2 |
| RL | 25 | 499671 | -1 |
| ARES | 20 | 448658 | 4 |
| CHDN | 25 | 470037 | -6 |
| SON | 25 | 128777 | 2 |
| Average | 23.9 | 461936 | -0.3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.9 hedge funds with bullish positions and the average amount invested in these stocks was $462 million. That figure was $1340 million in AXTA’s case. Comerica Incorporated (NYSE:CMA) is the most popular stock in this table. On the other hand PLDT Inc. (NYSE:PHI) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Axalta Coating Systems Ltd (NYSE:AXTA) is more popular among hedge funds. Our overall hedge fund sentiment score for AXTA is 76.5. 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. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately AXTA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AXTA were disappointed as the stock returned 5.8% since the end of the second quarter 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 most of these stocks already outperformed the market in 2020.
Follow Axalta Coating Systems Ltd. (NYSE:AXTA)
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Disclosure: None. This article was originally published at Insider Monkey.
