Should You Buy Kansas City Southern (KSU)?

World-class money managers like Bill Ackman and Barry Rosenstein only invest their wealthy clients’ money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It’s not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It’s also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.

Kansas City Southern (NYSE:KSU) has seen an increase in activity from the world’s largest hedge funds lately. Kansas City Southern (NYSE:KSU) was in 40 hedge funds’ portfolios at the end of the third quarter of 2015. There were 37 hedge funds in our database with Kansas City Southern (NYSE:KSU) holdings at the end of the previous quarter. 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 Foot Locker, Inc. (NYSE:FL), H&R Block, Inc. (NYSE:HRB), and CGI Group Inc. (USA) (NYSE:GIB) to gather more data points.

To the average investor, there are numerous signals stock market investors can use to size up stocks. A duo of the less utilized signals are hedge fund and insider trading sentiment. We have shown that, historically, those who follow the top picks of the elite investment managers can outclass their index-focused peers by a solid amount (see the details here).

Now, let’s go over the key action encompassing Kansas City Southern (NYSE:KSU).

Hedge fund activity in Kansas City Southern (NYSE:KSU)

At the end of the third quarter, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, an increase of 8% from the previous quarter. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Andreas Halvorsen’s Viking Global has the number one position in Kansas City Southern (NYSE:KSU), worth close to $280.9 million, corresponding to 1.1% of its total 13F portfolio. The second most bullish fund manager is Lee Ainslie of Maverick Capital, with a $215.9 million position; 3.7% of its 13F portfolio is allocated to the company. Other members of the smart money that are bullish encompass Scott Ferguson’s Sachem Head Capital, Stephen Mandel’s Lone Pine Capital, and Larry Robbins’ Glenview Capital.

As aggregate interest increased, specific money managers have been driving this bullishness. Sachem Head Capital, managed by Scott Ferguson, created the largest position in Kansas City Southern (NYSE:KSU). Sachem Head Capital had $137.7 million invested in the company at the end of the quarter. Sharlyn C. Heslam’s Stockbridge Partners also made a $60.6 million investment in the stock during the quarter. The following funds were also among the new KSU investors: J Kevin Kenny Jr’s Emerging Sovereign Group, Jason Karp’s Tourbillon Capital Partners, and Daniel S. Och’s OZ Management.

Let’s check out hedge fund activity in other stocks similar to Kansas City Southern (NYSE:KSU). These stocks are Foot Locker, Inc. (NYSE:FL), H&R Block, Inc. (NYSE:HRB), CGI Group Inc. (USA) (NYSE:GIB), and Autodesk, Inc. (NASDAQ:ADSK). All of these stocks’ market caps are similar to Kansas City Southern (NYSE:KSU)’s market cap.

As you can see, these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $984 million. That figure was $1.45 billion in Kansas City Southern (NYSE:KSU)’s case. H&R Block, Inc. (NYSE:HRB) is the most popular stock in this table. On the other hand, CGI Group Inc. (USA) (NYSE:GIB) is the least popular one with only 11 bullish hedge fund positions. Kansas City Southern (NYSE:KSU) is not the most popular stock in this group, but hedge fund interest is still above average. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard, H&R Block, Inc. (NYSE:HRB) might be a better candidate to consider a long position.