Hedge fund managers like David Einhorn, Bill Ackman, or Carl Icahn became billionaires through reaping large profits for their investors, which is why piggybacking their stock picks may provide us with significant returns as well. Many hedge funds, like Paul Singer’s Elliott Management, are pretty secretive, but we can still get some insights by analyzing their quarterly 13F filings. One of the most fertile grounds for large abnormal returns is hedge funds’ most popular small-cap picks, which are not so widely followed and often trade at a discount to their intrinsic value. In this article we will check out hedge fund activity in another small-cap stock: Kaiser Aluminum Corp. (NASDAQ:KALU).
Is Kaiser Aluminum Corp. (NASDAQ:KALU) undervalued? Money managers are in a bearish mood. The number of bullish hedge fund bets shrunk by 3 lately. Our calculations also showed that KALU isn’t among the 30 most popular stocks among hedge funds. KALU was in 14 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 17 hedge funds in our database with KALU positions at the end of the previous quarter.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Let’s view the key hedge fund action encompassing Kaiser Aluminum Corp. (NASDAQ:KALU).
Hedge fund activity in Kaiser Aluminum Corp. (NASDAQ:KALU)
At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from the second quarter of 2018. On the other hand, there were a total of 13 hedge funds with a bullish position in KALU a year ago. With hedgies’ sentiment swirling, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Kaiser Aluminum Corp. (NASDAQ:KALU), which was worth $25.1 million at the end of the fourth quarter. On the second spot was Royce & Associates which amassed $22.1 million worth of shares. Moreover, Fisher Asset Management, GLG Partners, and Huber Capital Management were also bullish on Kaiser Aluminum Corp. (NASDAQ:KALU), allocating a large percentage of their portfolios to this stock.
Seeing as Kaiser Aluminum Corp. (NASDAQ:KALU) has experienced bearish sentiment from the smart money, it’s safe to say that there lies a certain “tier” of hedgies who sold off their entire stakes in the third quarter. At the top of the heap, Ian Simm’s Impax Asset Management sold off the biggest investment of all the hedgies monitored by Insider Monkey, comprising an estimated $7.8 million in stock. Cliff Asness’s fund, AQR Capital Management, also dropped its stock, about $0.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 3 funds in the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Kaiser Aluminum Corp. (NASDAQ:KALU) but similarly valued. These stocks are Chesapeake Lodging Trust (NYSE:CHSP), Cubic Corporation (NYSE:CUB), State Auto Financial Corporation (NASDAQ:STFC), and Meritage Homes Corp (NYSE:MTH). This group of stocks’ market values match KALU’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CHSP | 12 | 16753 | 3 |
| CUB | 22 | 97403 | 4 |
| STFC | 4 | 16052 | 1 |
| MTH | 13 | 156459 | 0 |
| Average | 12.75 | 71667 | 2 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $72 million. That figure was $122 million in KALU’s case. Cubic Corporation (NYSE:CUB) is the most popular stock in this table. On the other hand State Auto Financial Corporation (NASDAQ:STFC) is the least popular one with only 4 bullish hedge fund positions. Kaiser Aluminum Corp. (NASDAQ:KALU) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on KALU, though not to the same extent, as the stock returned 18.9% and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
