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Is AAL A Good Stock To Buy According To Hedge Funds?

Abigail Fisher
·6 min read

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 817 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about American Airlines Group Inc (NASDAQ:AAL).

Is AAL a good stock to buy? American Airlines Group Inc (NASDAQ:AAL) investors should pay attention to a decrease in activity from the world's largest hedge funds in recent months. American Airlines Group Inc (NASDAQ:AAL) was in 37 hedge funds' portfolios at the end of September. The all time high for this statistic is 77. There were 47 hedge funds in our database with AAL positions at the end of the second quarter. Our calculations also showed that AAL isn't among the 30 most popular stocks among hedge funds (click for Q3 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.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 66 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.

Michael Hintze CQS Capital
Michael Hintze CQS Capital

Michael Hintze of CQS Cayman LP

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap 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. Now we're going to take a gander at the new hedge fund action surrounding American Airlines Group Inc (NASDAQ:AAL).

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

At the end of the third quarter, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from the second quarter of 2020. By comparison, 43 hedge funds held shares or bullish call options in AAL 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.

Among these funds, Citadel Investment Group held the most valuable stake in American Airlines Group Inc (NASDAQ:AAL), which was worth $105 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $52.2 million worth of shares. Balyasny Asset Management, D E Shaw, and CQS Cayman LP 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 White Square Capital allocated the biggest weight to American Airlines Group Inc (NASDAQ:AAL), around 4.83% of its 13F portfolio. CQS Cayman LP is also relatively very bullish on the stock, setting aside 3.93 percent of its 13F equity portfolio to AAL.

Seeing as American Airlines Group Inc (NASDAQ:AAL) has faced a decline in interest from the aggregate hedge fund industry, logic holds that there exists a select few funds that elected to cut their positions entirely last quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the largest investment of all the hedgies monitored by Insider Monkey, comprising an estimated $119 million in stock. D. E. Shaw's fund, D E Shaw, also cut its stock, about $110.4 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 10 funds last quarter.

Let's check out hedge fund activity in other stocks similar to American Airlines Group Inc (NASDAQ:AAL). We will take a look at Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA), Herbalife Nutrition Ltd. (NYSE:HLF), Vroom, Inc. (NASDAQ:VRM), Deckers Outdoor Corp (NYSE:DECK), BanColombia S.A. (NYSE:CIB), Toll Brothers Inc (NYSE:TOL), and WEX Inc (NYSE:WEX). All of these stocks' market caps are closest to AAL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MNTA,35,1256999,-7 HLF,36,2374897,0 VRM,34,399177,6 DECK,54,1096897,7 CIB,3,60943,-6 TOL,39,707443,0 WEX,26,288327,2 Average,32.4,883526,0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.4 hedge funds with bullish positions and the average amount invested in these stocks was $884 million. That figure was $208 million in AAL's case. Deckers Outdoor Corp (NYSE:DECK) is the most popular stock in this table. On the other hand BanColombia S.A. (NYSE:CIB) is the least popular one with only 3 bullish hedge fund positions. American Airlines Group Inc (NASDAQ:AAL) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AAL is 42.7. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on AAL as the stock returned 34.3% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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