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 see whether Alcoa Corporation (NYSE:AA) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Alcoa Corporation (NYSE:AA) was in 30 hedge funds’ portfolios at the end of the fourth quarter of 2019. AA investors should be aware of a decrease in support from the world’s most elite money managers lately. There were 33 hedge funds in our database with AA holdings at the end of the previous quarter. Our calculations also showed that AA 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).
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 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 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.
Didric Cederholm of Lion Point Capital
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s take a glance at the latest hedge fund action encompassing Alcoa Corporation (NYSE:AA).
Hedge fund activity in Alcoa Corporation (NYSE:AA)
At the end of the fourth quarter, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. On the other hand, there were a total of 30 hedge funds with a bullish position in AA a year ago. 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 Alcoa Corporation (NYSE:AA) was held by Renaissance Technologies, which reported holding $209.2 million worth of stock at the end of September. It was followed by Orbis Investment Management with a $170.8 million position. Other investors bullish on the company included Two Sigma Advisors, D E Shaw, and Lion Point. In terms of the portfolio weights assigned to each position Bronson Point Partners allocated the biggest weight to Alcoa Corporation (NYSE:AA), around 4.11% of its 13F portfolio. Elm Ridge Capital is also relatively very bullish on the stock, earmarking 3.81 percent of its 13F equity portfolio to AA.
Seeing as Alcoa Corporation (NYSE:AA) has experienced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few money managers that slashed their entire stakes last quarter. Interestingly, Paul Singer’s Elliott Management dropped the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $70.2 million in stock. Robert Bishop’s fund, Impala Asset Management, also cut its stock, about $17.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 3 funds last quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Alcoa Corporation (NYSE:AA) but similarly valued. These stocks are Medallia, Inc. (NYSE:MDLA), Gates Industrial Corporation plc (NYSE:GTES), Two Harbors Investment Corp (NYSE:TWO), and Clearway Energy, Inc. (NYSE:CWEN). All of these stocks’ market caps resemble AA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MDLA | 22 | 301398 | -1 |
| GTES | 9 | 61213 | -6 |
| TWO | 20 | 109765 | 4 |
| CWEN | 23 | 233438 | 2 |
| Average | 18.5 | 176454 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $176 million. That figure was $660 million in AA’s case. Clearway Energy, Inc. (NYSE:CWEN) is the most popular stock in this table. On the other hand Gates Industrial Corporation plc (NYSE:GTES) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Alcoa Corporation (NYSE:AA) 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 and still beat the market by 5.5 percentage points. Unfortunately AA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AA were disappointed as the stock returned -67% during the first two and a half months of 2020 (through March 25th) and underperformed 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 most of these stocks already outperformed the market in Q1.
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.
