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 Rexnord Corp (NYSE:RXN) and determine whether hedge funds had an edge regarding this stock.
Rexnord Corp (NYSE:RXN) was in 27 hedge funds’ portfolios at the end of June. The all time high for this statistics is 25. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. RXN shareholders have witnessed an increase in activity from the world’s largest hedge funds lately. There were 19 hedge funds in our database with RXN positions at the end of the first quarter. Our calculations also showed that RXN 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.
To most shareholders, hedge funds are perceived as underperforming, outdated investment vehicles of the past. While there are more than 8000 funds trading at present, We hone in on the moguls of this group, about 850 funds. It is estimated that this group of investors shepherd bulk of all hedge funds’ total asset base, and by observing their first-class investments, Insider Monkey has identified several investment strategies that have historically exceeded the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .
Fred DiSanto of Ancora 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we’re going to analyze the recent hedge fund action regarding Rexnord Corp (NYSE:RXN).
Hedge fund activity in Rexnord Corp (NYSE:RXN)
Heading into the third quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 42% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RXN over the last 20 quarters. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Rexnord Corp (NYSE:RXN) was held by Impax Asset Management, which reported holding $133.1 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $61.6 million position. Other investors bullish on the company included Alyeska Investment Group, Millennium Management, and Lodge Hill Capital. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Rexnord Corp (NYSE:RXN), around 6.52% of its 13F portfolio. Sandbar Asset Management is also relatively very bullish on the stock, dishing out 3.03 percent of its 13F equity portfolio to RXN.
Now, key money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, assembled the largest position in Rexnord Corp (NYSE:RXN). Millennium Management had $23.3 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also made a $17.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael Cowley’s Sandbar Asset Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Robert Vincent McHugh’s Jade Capital Advisors.
Let’s now review hedge fund activity in other stocks similar to Rexnord Corp (NYSE:RXN). We will take a look at ASGN Incorporated (NYSE:ASGN), Companhia Brasileira de Distrib. (NYSE:CBD), Appian Corporation (NASDAQ:APPN), LG Display Co Ltd. (NYSE:LPL), Kinsale Capital Group, Inc. (NASDAQ:KNSL), Crane Co. (NYSE:CR), and Advanced Drainage Systems Inc. (NYSE:WMS). This group of stocks’ market valuations are similar to RXN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ASGN | 13 | 73867 | -6 |
| CBD | 6 | 19316 | 1 |
| APPN | 18 | 467607 | 1 |
| LPL | 5 | 16158 | 1 |
| KNSL | 14 | 37234 | 7 |
| CR | 27 | 224559 | 1 |
| WMS | 24 | 582674 | -1 |
| Average | 15.3 | 203059 | 0.6 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.3 hedge funds with bullish positions and the average amount invested in these stocks was $203 million. That figure was $348 million in RXN’s case. Crane Co. (NYSE:CR) is the most popular stock in this table. On the other hand LG Display Co Ltd. (NYSE:LPL) is the least popular one with only 5 bullish hedge fund positions. Rexnord Corp (NYSE:RXN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RXN is 90. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately RXN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on RXN were disappointed as the stock returned -2.1% 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.
Follow Zurn Elkay Water Solutions Corp (NYSE:ZWS)
Follow Zurn Elkay Water Solutions Corp (NYSE:ZWS)
Disclosure: None. This article was originally published at Insider Monkey.
