Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Kellogg Company (NYSE:K).
Kellogg Company (NYSE:K) was in 27 hedge funds’ portfolios at the end of the third quarter of 2019. K has experienced a decrease in hedge fund sentiment in recent months. There were 28 hedge funds in our database with K holdings at the end of the previous quarter. Our calculations also showed that K isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
According to most market participants, hedge funds are viewed as underperforming, outdated financial vehicles of yesteryear. While there are more than 8000 funds in operation at present, Our researchers choose to focus on the elite of this club, approximately 750 funds. These hedge fund managers orchestrate the lion’s share of all hedge funds’ total capital, and by keeping track of their unrivaled picks, Insider Monkey has deciphered a number of investment strategies that have historically outstripped the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy surpassed the S&P 500 short ETFs by around 20 percentage points annually since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .
Richard S. Pzena of Pzena Investment Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we’re going to go over the key hedge fund action encompassing Kellogg Company (NYSE:K).
How are hedge funds trading Kellogg Company (NYSE:K)?
At Q3’s end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in K over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in Kellogg Company (NYSE:K), which was worth $261.5 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $150.2 million worth of shares. Pzena Investment Management, Millennium Management, and GLG Partners 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 2.05% of its 13F portfolio. Cognios Capital is also relatively very bullish on the stock, earmarking 0.92 percent of its 13F equity portfolio to K.
Because Kellogg Company (NYSE:K) has faced bearish sentiment from hedge fund managers, we can see that there was a specific group of funds that elected to cut their positions entirely in the third quarter. At the top of the heap, Ray Dalio’s Bridgewater Associates sold off the largest investment of the “upper crust” of funds followed by Insider Monkey, worth close to $29.2 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund cut about $5.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 1 funds in the third quarter.
Let’s check out hedge fund activity in other stocks similar to Kellogg Company (NYSE:K). We will take a look at Hartford Financial Services Group Inc (NYSE:HIG), Stanley Black & Decker, Inc. (NYSE:SWK), Snap Inc. (NYSE:SNAP), and Cerner Corporation (NASDAQ:CERN). This group of stocks’ market valuations resemble K’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HIG | 32 | 848897 | 2 |
| SWK | 26 | 1040404 | -1 |
| SNAP | 52 | 2118425 | 7 |
| CERN | 33 | 954875 | 4 |
| Average | 35.75 | 1240650 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.75 hedge funds with bullish positions and the average amount invested in these stocks was $1241 million. That figure was $629 million in K’s case. Snap Inc. (NYSE:SNAP) is the most popular stock in this table. On the other hand Stanley Black & Decker, Inc. (NYSE:SWK) is the least popular one with only 26 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. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately K wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); K investors were disappointed as the stock returned 26.1% in 2019 and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 65 percent of these stocks already outperformed the market in 2019.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
