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Should You Buy Kansas City Southern (KSU)?

Abigail Fisher

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Kansas City Southern (NYSE:KSU).

Kansas City Southern (NYSE:KSU) shareholders have witnessed an increase in activity from the world's largest hedge funds of late. Our calculations also showed that KSU isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 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 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.

[caption id="attachment_26357" align="aligncenter" width="359"] Ken Fisher of Fisher Asset Management[/caption]

FISHER ASSET MANAGEMENT

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the new hedge fund action surrounding Kansas City Southern (NYSE:KSU).

How have hedgies been trading Kansas City Southern (NYSE:KSU)?

At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KSU over the last 17 quarters. With the smart money's capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

KSU_dec2019

The largest stake in Kansas City Southern (NYSE:KSU) was held by Citadel Investment Group, which reported holding $126.7 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $75.8 million position. Other investors bullish on the company included Interval Partners, Winton Capital Management, and Scopus Asset Management. In terms of the portfolio weights assigned to each position Marlowe Partners allocated the biggest weight to Kansas City Southern (NYSE:KSU), around 6.27% of its portfolio. 3G Capital is also relatively very bullish on the stock, setting aside 4.68 percent of its 13F equity portfolio to KSU.

Now, specific money managers have been driving this bullishness. Encompass Capital Advisors, managed by Todd J. Kantor, initiated the largest position in Kansas City Southern (NYSE:KSU). Encompass Capital Advisors had $13.3 million invested in the company at the end of the quarter. Karim Abbadi and Edward McBride's Centiva Capital also made a $6.7 million investment in the stock during the quarter. The other funds with brand new KSU positions are Benjamin A. Smith's Laurion Capital Management, David Costen Haley's HBK Investments, and Robert Bishop's Impala Asset Management.

Let's now review hedge fund activity in other stocks similar to Kansas City Southern (NYSE:KSU). These stocks are Discovery Inc. (NASDAQ:DISCK), Burlington Stores Inc (NYSE:BURL), W.R. Berkley Corporation (NYSE:WRB), and The Liberty SiriusXM Group (NASDAQ:LSXMA). All of these stocks' market caps resemble KSU's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DISCK,30,727071,0 BURL,37,1512597,6 WRB,21,337881,-2 LSXMA,39,1484908,5 Average,31.75,1015614,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.75 hedge funds with bullish positions and the average amount invested in these stocks was $1016 million. That figure was $551 million in KSU's case. The Liberty SiriusXM Group (NASDAQ:LSXMA) is the most popular stock in this table. On the other hand W.R. Berkley Corporation (NYSE:WRB) is the least popular one with only 21 bullish hedge fund positions. Kansas City Southern (NYSE:KSU) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on KSU as the stock returned 14.6% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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