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

In this article we are going to use hedge fund sentiment as a tool and determine whether Kansas City Southern (NYSE:KSU) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Kansas City Southern (NYSE:KSU) was in 61 hedge funds’ portfolios at the end of June. The all time high for this statistic was previously 53. This means the bullish number of hedge fund positions in this stock currently sits at its new all time high. KSU shareholders have witnessed an increase in support from the world’s most elite money managers recently. There were 49 hedge funds in our database with KSU holdings at the end of March. Our calculations also showed that KSU isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Richard Chilton of Chilton Investment Company

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind we’re going to analyze the fresh hedge fund action regarding Kansas City Southern (NYSE:KSU).

Do Hedge Funds Think KSU Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 61 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the first quarter of 2020. By comparison, 47 hedge funds held shares or bullish call options in KSU a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Among these funds, Pentwater Capital Management held the most valuable stake in Kansas City Southern (NYSE:KSU), which was worth $585.2 million at the end of the second quarter. On the second spot was Millennium Management which amassed $238.8 million worth of shares. Citadel Investment Group, TIG Advisors, and Chilton Investment Company 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 BCK Capital allocated the biggest weight to Kansas City Southern (NYSE:KSU), around 9.36% of its 13F portfolio. Hunting Hill Global Capital is also relatively very bullish on the stock, designating 7.99 percent of its 13F equity portfolio to KSU.

Consequently, key hedge funds have jumped into Kansas City Southern (NYSE:KSU) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the most outsized position in Kansas City Southern (NYSE:KSU). Balyasny Asset Management had $128.2 million invested in the company at the end of the quarter. Daniel S. Och’s OZ Management also initiated a $107.7 million position during the quarter. The other funds with new positions in the stock are Simon Sadler’s Segantii Capital, Simon Davies’s Sand Grove Capital Partners, and John Paulson’s Paulson & Co.

Let’s now take a look at hedge fund activity in other stocks similar to Kansas City Southern (NYSE:KSU). These stocks are Teladoc Health, Inc (NYSE:TDOC), Verisign, Inc. (NASDAQ:VRSN), Telefonica S.A. (NYSE:TEF), Consolidated Edison, Inc. (NYSE:ED), Realty Income Corporation (NYSE:O), DTE Energy Company (NYSE:DTE), and ZTO Express (Cayman) Inc. (NYSE:ZTO). This group of stocks’ market caps resemble KSU’s market cap.

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As you can see these stocks had an average of 27.7 hedge funds with bullish positions and the average amount invested in these stocks was $1699 million. That figure was $3303 million in KSU’s case. Teladoc Health, Inc (NYSE:TDOC) is the most popular stock in this table. On the other hand Telefonica S.A. (NYSE:TEF) is the least popular one with only 4 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 90. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 26.3% in 2021 through October 29th but still managed to beat the market by 2.3 percentage points. Hedge funds were also right about betting on KSU as the stock returned 9.7% since the end of June (through 10/29) 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.

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