Was The Smart Money Right About Crowding Into Kansas City Southern (KSU)?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Kansas City Southern (NYSE:KSU).

Is Kansas City Southern (NYSE:KSU) a healthy stock for your portfolio? Hedge funds were betting on the stock. The number of bullish hedge fund positions improved by 2 lately. Kansas City Southern (NYSE:KSU) was in 47 hedge funds’ portfolios at the end of June. The all time high for this statistics is 45. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that KSU isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 45 hedge funds in our database with KSU positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jeffrey Talpins of Element Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s take a look at the latest hedge fund action encompassing Kansas City Southern (NYSE:KSU).

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

At the end of the second quarter, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in KSU a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Fisher Asset Management, managed by Ken Fisher, holds the most valuable position in Kansas City Southern (NYSE:KSU). Fisher Asset Management has a $75.4 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is Chilton Investment Company, led by Richard Chilton, holding a $70.9 million position; 2.3% of its 13F portfolio is allocated to the stock. Other members of the smart money with similar optimism include Jonathan Barrett and Paul Segal’s Luminus Management, Robert Bishop’s Impala Asset Management and Principal Global Investors’s Columbus Circle Investors. In terms of the portfolio weights assigned to each position Luminus Management allocated the biggest weight to Kansas City Southern (NYSE:KSU), around 6.84% of its 13F portfolio. Mountain Road Advisors is also relatively very bullish on the stock, dishing out 6.56 percent of its 13F equity portfolio to KSU.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Moore Global Investments, managed by Louis Bacon, established the most outsized position in Kansas City Southern (NYSE:KSU). Moore Global Investments had $19.8 million invested in the company at the end of the quarter. Jeffrey Talpins’s Element Capital Management also initiated a $1.7 million position during the quarter. The other funds with brand new KSU positions are Greg Poole’s Echo Street Capital Management, Anand Parekh’s Alyeska Investment Group, and Benjamin A. Smith’s Laurion Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Kansas City Southern (NYSE:KSU) but similarly valued. We will take a look at Jack Henry & Associates, Inc. (NASDAQ:JKHY), Roku, Inc. (NASDAQ:ROKU), Boston Properties, Inc. (NYSE:BXP), EPAM Systems Inc (NYSE:EPAM), Teradyne, Inc. (NASDAQ:TER), Dover Corporation (NYSE:DOV), and Rollins, Inc. (NYSE:ROL). This group of stocks’ market values are similar to KSU’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.1 hedge funds with bullish positions and the average amount invested in these stocks was $624 million. That figure was $503 million in KSU’s case. Roku, Inc. (NASDAQ:ROKU) is the most popular stock in this table. On the other hand EPAM Systems Inc (NYSE:EPAM) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Kansas City Southern (NYSE:KSU) is more popular among hedge funds. Our overall hedge fund sentiment score for KSU is 87. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on KSU as the stock returned 23.8% since the end of June (through 10/23) 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.

Disclosure: None. This article was originally published at Insider Monkey.