Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Hexcel Corporation (NYSE:HXL) a buy, sell, or hold? Hedge funds are taking a bullish view. The number of bullish hedge fund positions inched up by 3 recently. Our calculations also showed that HXL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). HXL was in 26 hedge funds' portfolios at the end of September. There were 23 hedge funds in our database with HXL holdings at the end of the previous quarter. Video: Click the image to 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 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_193030" align="aligncenter" width="450"] Tom Gayner of Markel Gayner Asset Management[/caption]
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 view the key hedge fund action encompassing Hexcel Corporation (NYSE:HXL).
What have hedge funds been doing with Hexcel Corporation (NYSE:HXL)?
Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in HXL a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
More specifically, Millennium Management was the largest shareholder of Hexcel Corporation (NYSE:HXL), with a stake worth $23.9 million reported as of the end of September. Trailing Millennium Management was D E Shaw, which amassed a stake valued at $22.4 million. Markel Gayner Asset Management, Renaissance Technologies, and AQR 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 PDT Partners allocated the biggest weight to Hexcel Corporation (NYSE:HXL), around 0.29% of its portfolio. Markel Gayner Asset Management is also relatively very bullish on the stock, earmarking 0.21 percent of its 13F equity portfolio to HXL.
As aggregate interest increased, key hedge funds have jumped into Hexcel Corporation (NYSE:HXL) headfirst. Waratah Capital Advisors, managed by Brad Dunkley and Blair Levinsky, initiated the biggest position in Hexcel Corporation (NYSE:HXL). Waratah Capital Advisors had $1.1 million invested in the company at the end of the quarter. Matthew Tewksbury's Stevens Capital Management also made a $0.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Matthew Hulsizer's PEAK6 Capital Management, Steve Cohen's Point72 Asset Management, and Michael Gelband's ExodusPoint Capital.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Hexcel Corporation (NYSE:HXL) but similarly valued. These stocks are Alteryx, Inc. (NYSE:AYX), Catalent Inc (NYSE:CTLT), TIM Participacoes SA (NYSE:TSU), and Ceridian HCM Holding Inc. (NYSE:CDAY). All of these stocks' market caps match HXL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AYX,44,1334248,6 CTLT,27,392969,7 TSU,13,290605,1 CDAY,28,1115679,6 Average,28,783375,5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $783 million. That figure was $122 million in HXL's case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand TIM Participacoes SA (NYSE:TSU) is the least popular one with only 13 bullish hedge fund positions. Hexcel Corporation (NYSE:HXL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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. Unfortunately HXL wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); HXL investors were disappointed as the stock returned -2.8% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.