We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Aerojet Rocketdyne Holdings Inc (NYSE:AJRD) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Aerojet Rocketdyne Holdings Inc (NYSE:AJRD) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds’ portfolios at the end of December. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as The Descartes Systems Group Inc (NASDAQ:DSGX), Embraer SA (NYSE:ERJ), and National Health Investors Inc (NYSE:NHI) to gather more data points. Our calculations also showed that AJRD isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 S&P 500 ETFs by more than 41 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 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 stocks that are in our short portfolio.
Warren Lichtenstein of Steel Partners
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to analyze the fresh hedge fund action encompassing Aerojet Rocketdyne Holdings Inc (NYSE:AJRD).
How have hedgies been trading Aerojet Rocketdyne Holdings Inc (NYSE:AJRD)?
At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the third quarter of 2019. On the other hand, there were a total of 19 hedge funds with a bullish position in AJRD a year ago. With hedge funds’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Warren Lichtenstein’s Steel Partners has the most valuable position in Aerojet Rocketdyne Holdings Inc (NYSE:AJRD), worth close to $180.4 million, accounting for 73.5% of its total 13F portfolio. The second largest stake is held by GAMCO Investors, managed by Mario Gabelli, which holds a $166 million position; the fund has 1.3% of its 13F portfolio invested in the stock. Remaining members of the smart money that are bullish include Israel Englander’s Millennium Management, and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Steel Partners allocated the biggest weight to Aerojet Rocketdyne Holdings Inc (NYSE:AJRD), around 73.52% of its 13F portfolio. GAMCO Investors is also relatively very bullish on the stock, dishing out 1.33 percent of its 13F equity portfolio to AJRD.
Judging by the fact that Aerojet Rocketdyne Holdings Inc (NYSE:AJRD) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there lies a certain “tier” of hedgies who sold off their full holdings last quarter. At the top of the heap, David Cohen and Harold Levy’s Iridian Asset Management cut the biggest position of the 750 funds watched by Insider Monkey, worth an estimated $0.9 million in stock. Donald Sussman’s fund, Paloma Partners, also said goodbye to its stock, about $0.2 million worth. These moves are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Aerojet Rocketdyne Holdings Inc (NYSE:AJRD) but similarly valued. These stocks are The Descartes Systems Group Inc (NASDAQ:DSGX), Embraer SA (NYSE:ERJ), National Health Investors Inc (NYSE:NHI), and Exponent, Inc. (NASDAQ:EXPO). This group of stocks’ market caps are closest to AJRD’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DSGX | 12 | 97098 | -2 |
| ERJ | 14 | 170112 | -1 |
| NHI | 15 | 143101 | -2 |
| EXPO | 17 | 110746 | -4 |
| Average | 14.5 | 130264 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $437 million in AJRD’s case. Exponent, Inc. (NASDAQ:EXPO) is the most popular stock in this table. On the other hand The Descartes Systems Group Inc (NASDAQ:DSGX) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Aerojet Rocketdyne Holdings Inc (NYSE:AJRD) is more popular among hedge funds. 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. These stocks lost 17.4% in 2020 through March 25th but still managed to beat the market by 5.5 percentage points. Hedge funds were also right about betting on AJRD as the stock returned -17% so far in Q1 (through March 25th) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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.
