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Did Hedge Funds Make The Right Call On AAR Corp. (AIR) ?

Abigail Fisher

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards AAR Corp. (NYSE:AIR) at the end of the first quarter and determine whether the smart money was really smart about this stock.

AAR Corp. (NYSE:AIR) investors should pay attention to a decrease in activity from the world's largest hedge funds lately. AIR was in 18 hedge funds' portfolios at the end of the first quarter of 2020. There were 23 hedge funds in our database with AIR holdings at the end of the previous quarter. Our calculations also showed that AIR isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

In the eyes of most market participants, hedge funds are viewed as underperforming, old financial vehicles of yesteryear. While there are over 8000 funds in operation at present, Our researchers hone in on the top tier of this group, approximately 850 funds. It is estimated that this group of investors preside over most of the hedge fund industry's total capital, and by paying attention to their highest performing investments, Insider Monkey has unsheathed many investment strategies that have historically beaten Mr. Market. Insider Monkey's flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Mario Gabelli of GAMCO Investors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's analyze the fresh hedge fund action regarding AAR Corp. (NYSE:AIR).

How have hedgies been trading AAR Corp. (NYSE:AIR)?

At the end of the first quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from one quarter earlier. By comparison, 23 hedge funds held shares or bullish call options in AIR a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Fisher Asset Management was the largest shareholder of AAR Corp. (NYSE:AIR), with a stake worth $13.2 million reported as of the end of September. Trailing Fisher Asset Management was GAMCO Investors, which amassed a stake valued at $8 million. Beach Point Capital Management, Adage Capital Management, and Prescott Group 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 Beach Point Capital Management allocated the biggest weight to AAR Corp. (NYSE:AIR), around 4.96% of its 13F portfolio. Prescott Group Capital Management is also relatively very bullish on the stock, setting aside 1.13 percent of its 13F equity portfolio to AIR.

Since AAR Corp. (NYSE:AIR) has experienced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there is a sect of hedgies who sold off their full holdings in the first quarter. Interestingly, Principal Global Investors's Columbus Circle Investors said goodbye to the largest investment of the "upper crust" of funds followed by Insider Monkey, valued at an estimated $33.4 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also sold off its stock, about $2.1 million worth. These moves are important to note, as total hedge fund interest fell by 5 funds in the first quarter.

Let's check out hedge fund activity in other stocks similar to AAR Corp. (NYSE:AIR). These stocks are Bloomin' Brands Inc (NASDAQ:BLMN), Qutoutiao Inc. (NASDAQ:QTT), PDC Energy Inc (NASDAQ:PDCE), and Oxford Industries, Inc. (NYSE:OXM). This group of stocks' market values match AIR's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BLMN,24,88391,6 QTT,9,5239,4 PDCE,25,114905,-7 OXM,12,27638,0 Average,17.5,59043,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $43 million in AIR's case. PDC Energy Inc (NASDAQ:PDCE) is the most popular stock in this table. On the other hand Qutoutiao Inc. (NASDAQ:QTT) is the least popular one with only 9 bullish hedge fund positions. AAR Corp. (NYSE:AIR) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately AIR wasn't nearly as popular as these 10 stocks and hedge funds that were betting on AIR were disappointed as the stock returned -0.2% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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