Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Axalta Coating Systems Ltd (NYSE:AXTA).
Axalta Coating Systems Ltd (NYSE:AXTA) investors should be aware of an increase in support from the world's most elite money managers recently. AXTA was in 56 hedge funds' portfolios at the end of September. There were 41 hedge funds in our database with AXTA holdings at the end of the previous quarter. Our calculations also showed that AXTA 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).
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_315178" align="alignnone" width="600"] Warren Buffett of Berkshire Hathaway[/caption]
We leave no stone unturned when looking for the next great investment idea. For example 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. 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 is still extremely cheap despite already gaining 20 percent. Now we're going to take a peek at the fresh hedge fund action surrounding Axalta Coating Systems Ltd (NYSE:AXTA).
How are hedge funds trading Axalta Coating Systems Ltd (NYSE:AXTA)?
At Q3's end, a total of 56 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 37% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AXTA over the last 17 quarters. With hedge funds' capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
More specifically, Berkshire Hathaway was the largest shareholder of Axalta Coating Systems Ltd (NYSE:AXTA), with a stake worth $731.6 million reported as of the end of September. Trailing Berkshire Hathaway was Diamond Hill Capital, which amassed a stake valued at $239.9 million. Renaissance Technologies, FPR Partners, and Praesidium Investment 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 JANA Partners allocated the biggest weight to Axalta Coating Systems Ltd (NYSE:AXTA), around 9.72% of its 13F portfolio. Albar Capital is also relatively very bullish on the stock, designating 9.33 percent of its 13F equity portfolio to AXTA.
Now, specific money managers were breaking ground themselves. TOMS Capital, managed by Benjamin Pass, initiated the biggest position in Axalta Coating Systems Ltd (NYSE:AXTA). TOMS Capital had $39.9 million invested in the company at the end of the quarter. Zach Schreiber's Point State Capital also initiated a $38.2 million position during the quarter. The other funds with new positions in the stock are Carl Tiedemann and Michael Tiedemann's TIG Advisors, Dmitry Balyasny's Balyasny Asset Management, and Anand Parekh's Alyeska Investment Group.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Axalta Coating Systems Ltd (NYSE:AXTA) but similarly valued. We will take a look at Gentex Corporation (NASDAQ:GNTX), Five Below Inc (NASDAQ:FIVE), Hexcel Corporation (NYSE:HXL), and Alteryx, Inc. (NYSE:AYX). This group of stocks' market caps match AXTA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GNTX,28,468671,5 FIVE,34,469205,-4 HXL,26,122315,3 AYX,44,1334248,6 Average,33,598610,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $599 million. That figure was $2299 million in AXTA's case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand Hexcel Corporation (NYSE:HXL) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Axalta Coating Systems Ltd (NYSE:AXTA) is more popular among hedge funds. 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. Unfortunately AXTA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AXTA were disappointed as the stock returned 29.2% so far in 2019 (through 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019. 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.