Were Hedge Funds Right About Piling Into Kansas City Southern (KSU)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Kansas City Southern (NYSE:KSU) and determine whether the smart money was really smart about this stock.

Kansas City Southern (NYSE:KSU) was in 45 hedge funds’ portfolios at the end of March. KSU investors should be aware of an increase in support from the world’s most elite money managers of late. There were 40 hedge funds in our database with KSU positions at the end of the previous quarter. Our calculations also showed that KSU isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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

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 58 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.

Jonathan Barrett of Luminus Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a look at the key hedge fund action surrounding Kansas City Southern (NYSE:KSU).

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

At the end of the first quarter, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from one quarter earlier. By comparison, 26 hedge funds held shares or bullish call options in KSU a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Ken Fisher’s Fisher Asset Management has the most valuable position in Kansas City Southern (NYSE:KSU), worth close to $67.3 million, comprising 0.1% of its total 13F portfolio. The second most bullish fund manager is Robert Bishop of Impala Asset Management, with a $63.7 million position; the fund has 8.6% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism include Jonathan Barrett and Paul Segal’s Luminus Management, Israel Englander’s Millennium Management and Richard Chilton’s Chilton Investment Company. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to Kansas City Southern (NYSE:KSU), around 8.58% of its 13F portfolio. Mountain Road Advisors is also relatively very bullish on the stock, earmarking 6.64 percent of its 13F equity portfolio to KSU.

Now, key hedge funds were leading the bulls’ herd. Luminus Management, managed by Jonathan Barrett and Paul Segal, created the most valuable position in Kansas City Southern (NYSE:KSU). Luminus Management had $52.7 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $20.2 million position during the quarter. The other funds with new positions in the stock are Brandon Haley’s Holocene Advisors, Parvinder Thiara’s Athanor Capital, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Kansas City Southern (NYSE:KSU) but similarly valued. These stocks are International Paper Company (NYSE:IP), Atmos Energy Corporation (NYSE:ATO), Dover Corporation (NYSE:DOV), and Healthpeak Properties, Inc. (NYSE:PEAK). This group of stocks’ market valuations are closest to KSU’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $347 million. That figure was $524 million in KSU’s case. Dover Corporation (NYSE:DOV) is the most popular stock in this table. On the other hand Atmos Energy Corporation (NYSE:ATO) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Kansas City Southern (NYSE:KSU) is more popular among hedge funds. 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately KSU wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KSU were disappointed as the stock returned 17.7% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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