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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Trinity Industries, Inc. (NYSE:TRN) and determine whether hedge funds had an edge regarding this stock.
Is Trinity Industries, Inc. (NYSE:TRN) a splendid investment today? Money managers were getting less optimistic. The number of bullish hedge fund positions were trimmed by 9 recently. Our calculations also showed that TRN 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.
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ric Dillon of Diamond Hill Capital
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. With all of this in mind let's go over the key hedge fund action encompassing Trinity Industries, Inc. (NYSE:TRN).
What does smart money think about Trinity Industries, Inc. (NYSE:TRN)?
At Q1's end, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -33% from the previous quarter. By comparison, 28 hedge funds held shares or bullish call options in TRN a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, ValueAct Capital held the most valuable stake in Trinity Industries, Inc. (NYSE:TRN), which was worth $434 million at the end of the third quarter. On the second spot was Omega Advisors which amassed $45.5 million worth of shares. Cardinal Capital, StackLine Partners, and GAMCO Investors 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 StackLine Partners allocated the biggest weight to Trinity Industries, Inc. (NYSE:TRN), around 12.17% of its 13F portfolio. ValueAct Capital is also relatively very bullish on the stock, earmarking 6.23 percent of its 13F equity portfolio to TRN.
Since Trinity Industries, Inc. (NYSE:TRN) has experienced a decline in interest from hedge fund managers, it's safe to say that there is a sect of money managers who sold off their entire stakes heading into Q4. Intriguingly, Eli Samaha's Madison Avenue Partners dumped the largest position of the 750 funds tracked by Insider Monkey, valued at about $21.4 million in stock. Robert Bishop's fund, Impala Asset Management, also dumped its stock, about $18.5 million worth. These moves are interesting, as aggregate hedge fund interest fell by 9 funds heading into Q4.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Trinity Industries, Inc. (NYSE:TRN) but similarly valued. We will take a look at Altair Engineering Inc. (NASDAQ:ALTR), Saia Inc (NASDAQ:SAIA), Arcosa, Inc. (NYSE:ACA), and Copa Holdings, S.A. (NYSE:CPA). This group of stocks' market values match TRN's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALTR,9,195585,-1 SAIA,13,63362,-4 ACA,17,184066,-3 CPA,15,138965,-7 Average,13.5,145495,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $145 million. That figure was $622 million in TRN's case. Arcosa, Inc. (NYSE:ACA) is the most popular stock in this table. On the other hand Altair Engineering Inc. (NASDAQ:ALTR) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Trinity Industries, Inc. (NYSE:TRN) is more popular among hedge funds. 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 and still beat the market by 17.1 percentage points. Unfortunately TRN wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TRN were disappointed as the stock returned 23.6% since the end of the first quarter 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 most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.