It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds' favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like Arconic Inc. (NYSE:ARNC) and compare its performance against hedge funds' favorite stocks.
Is Arconic Inc. (NYSE:ARNC) a healthy stock for your portfolio? Money managers are selling. The number of bullish hedge fund bets shrunk by 8 lately. Our calculations also showed that ARNC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_26345" align="alignnone" width="600"] Paul Singer of Elliott Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now let's take a gander at the recent hedge fund action regarding Arconic Inc. (NYSE:ARNC).
How are hedge funds trading Arconic Inc. (NYSE:ARNC)?
Heading into the fourth quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from one quarter earlier. By comparison, 40 hedge funds held shares or bullish call options in ARNC a year ago. With hedge funds' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
More specifically, Elliott Management was the largest shareholder of Arconic Inc. (NYSE:ARNC), with a stake worth $1080.7 million reported as of the end of September. Trailing Elliott Management was First Pacific Advisors, which amassed a stake valued at $649 million. Orbis Investment Management, D E Shaw, and Kensico Capital 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 Elliott Management allocated the biggest weight to Arconic Inc. (NYSE:ARNC), around 9% of its 13F portfolio. First Pacific Advisors is also relatively very bullish on the stock, earmarking 6.11 percent of its 13F equity portfolio to ARNC.
Seeing as Arconic Inc. (NYSE:ARNC) has faced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there were a few hedgies who sold off their full holdings in the third quarter. Interestingly, John Orrico's Water Island Capital cut the biggest stake of the 750 funds monitored by Insider Monkey, worth close to $43.4 million in stock. Zach Schreiber's fund, Point State Capital, also said goodbye to its stock, about $10.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 8 funds in the third quarter.
Let's check out hedge fund activity in other stocks similar to Arconic Inc. (NYSE:ARNC). We will take a look at Yandex NV (NASDAQ:YNDX), FMC Corporation (NYSE:FMC), InterContinental Hotels Group PLC (NYSE:IHG), and Western Gas Partners, LP (NYSE:WES). This group of stocks' market caps are closest to ARNC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position YNDX,35,809543,5 FMC,36,788705,0 IHG,7,29788,3 WES,10,107648,1 Average,22,433921,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $434 million. That figure was $3137 million in ARNC's case. FMC Corporation (NYSE:FMC) is the most popular stock in this table. On the other hand InterContinental Hotels Group PLC (NYSE:IHG) is the least popular one with only 7 bullish hedge fund positions. Arconic Inc. (NYSE:ARNC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on ARNC as the stock returned 88.1% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness. 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.