U.S. Markets close in 44 mins

Hedge Fund Consensus Stocks vs. Alcoa Corporation (AA) In 2019

Nina Todic

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Alcoa Corporation (NYSE:AA) and compare its performance to hedge funds' consensus picks in 2019.

Alcoa Corporation (NYSE:AA) was in 28 hedge funds' portfolios at the end of the third quarter of 2019. AA shareholders have witnessed an increase in activity from the world's largest hedge funds of late. There were 26 hedge funds in our database with AA positions at the end of the previous quarter. Our calculations also showed that AA 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="aligncenter" width="489"] Paul Singer of Elliott Management[/caption]

Paul Singer ELLIOTT MANAGEMENT

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock 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. With all of this in mind we're going to analyze the new hedge fund action encompassing Alcoa Corporation (NYSE:AA).

How have hedgies been trading Alcoa Corporation (NYSE:AA)?

At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in AA over the last 17 quarters. With the smart money's sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

The largest stake in Alcoa Corporation (NYSE:AA) was held by Renaissance Technologies, which reported holding $130 million worth of stock at the end of September. It was followed by Orbis Investment Management with a $126.6 million position. Other investors bullish on the company included Elliott Management, Citadel Investment Group, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Bronson Point Partners allocated the biggest weight to Alcoa Corporation (NYSE:AA), around 4.19% of its 13F portfolio. Elm Ridge Capital is also relatively very bullish on the stock, dishing out 3.72 percent of its 13F equity portfolio to AA.

Consequently, specific money managers were leading the bulls' herd. Impala Asset Management, managed by Robert Bishop, initiated the most valuable position in Alcoa Corporation (NYSE:AA). Impala Asset Management had $17.3 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson's Adage Capital Management also made a $12 million investment in the stock during the quarter. The other funds with new positions in the stock are Alexander Mitchell's Scopus Asset Management, Paul Marshall and Ian Wace's Marshall Wace, and Sara Nainzadeh's Centenus Global Management.

Let's also examine hedge fund activity in other stocks similar to Alcoa Corporation (NYSE:AA). We will take a look at Ardagh Group S.A. (NYSE:ARD), Apple Hospitality REIT Inc (NYSE:APLE), Equitrans Midstream Corporation (NYSE:ETRN), and Tech Data Corporation (NASDAQ:TECD). This group of stocks' market valuations match AA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ARD,12,63888,1 APLE,12,106485,-2 ETRN,16,334604,0 TECD,21,450204,3 Average,15.25,238795,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $239 million. That figure was $530 million in AA's case. Tech Data Corporation (NASDAQ:TECD) is the most popular stock in this table. On the other hand Ardagh Group S.A. (NYSE:ARD) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Alcoa Corporation (NYSE:AA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately AA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AA were disappointed as the stock returned -19.1% in 2019 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 outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

Related Content