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. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Kaiser Aluminum Corp. (NASDAQ:KALU).
Kaiser Aluminum Corp. (NASDAQ:KALU) investors should be aware of a decrease in hedge fund sentiment in recent months. Our calculations also showed that KALU 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).
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 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. 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.
Ken Fisher of Fisher Asset Management
We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. 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 (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). 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. With all of this in mind we’re going to take a look at the latest hedge fund action surrounding Kaiser Aluminum Corp. (NASDAQ:KALU).
What have hedge funds been doing with Kaiser Aluminum Corp. (NASDAQ:KALU)?
Heading into the first quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in KALU 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.
Among these funds, Renaissance Technologies held the most valuable stake in Kaiser Aluminum Corp. (NASDAQ:KALU), which was worth $32.9 million at the end of the third quarter. On the second spot was GLG Partners which amassed $26.8 million worth of shares. Fisher Asset Management, Citadel Investment Group, and Winton Capital Management 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 Third Avenue Management allocated the biggest weight to Kaiser Aluminum Corp. (NASDAQ:KALU), around 0.38% of its 13F portfolio. Huber Capital Management is also relatively very bullish on the stock, dishing out 0.36 percent of its 13F equity portfolio to KALU.
Because Kaiser Aluminum Corp. (NASDAQ:KALU) has experienced declining sentiment from the smart money, it’s safe to say that there is a sect of fund managers that decided to sell off their positions entirely by the end of the third quarter. Interestingly, Michael Price’s MFP Investors said goodbye to the largest stake of the “upper crust” of funds tracked by Insider Monkey, comprising about $2 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also cut its stock, about $1.1 million worth. These transactions are interesting, as total hedge fund interest was cut by 4 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks similar to Kaiser Aluminum Corp. (NASDAQ:KALU). These stocks are Easterly Government Properties Inc (NYSE:DEA), MACOM Technology Solutions Holdings, Inc. (NASDAQ:MTSI), PJT Partners Inc (NYSE:PJT), and Usa Compression Partners LP (NYSE:USAC). This group of stocks’ market valuations are closest to KALU’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| DEA | 10 | 105516 | -1 |
| MTSI | 18 | 223816 | 3 |
| PJT | 20 | 156297 | 3 |
| USAC | 8 | 19195 | 4 |
| Average | 14 | 126206 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14 hedge funds with bullish positions and the average amount invested in these stocks was $126 million. That figure was $111 million in KALU’s case. PJT Partners Inc (NYSE:PJT) is the most popular stock in this table. On the other hand Usa Compression Partners LP (NYSE:USAC) is the least popular one with only 8 bullish hedge fund positions. Kaiser Aluminum Corp. (NASDAQ:KALU) 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. 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 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately KALU wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KALU were disappointed as the stock returned -40.7% during the same time period 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 many of these stocks already outperformed the market so far this year.
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.
