Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to AAR Corp. (NYSE:AIR) changed recently.
AAR Corp. (NYSE:AIR) shareholders have witnessed a decrease in support from the world's most elite money managers of late. AIR was in 18 hedge funds' portfolios at the end of September. There were 22 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 Q3 rankings and see the video below for Q2 rankings). 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' 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_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/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 go over the recent hedge fund action encompassing AAR Corp. (NYSE:AIR).
How have hedgies been trading AAR Corp. (NYSE:AIR)?
At the end of the third quarter, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AIR over the last 17 quarters. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Among these funds, Fisher Asset Management held the most valuable stake in AAR Corp. (NYSE:AIR), which was worth $40.7 million at the end of the third quarter. On the second spot was Columbus Circle Investors which amassed $31 million worth of shares. Beach Point Capital Management, GAMCO Investors, and Renaissance Technologies 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 8.02% of its 13F portfolio. Columbus Circle Investors is also relatively very bullish on the stock, dishing out 1.14 percent of its 13F equity portfolio to AIR.
Seeing as AAR Corp. (NYSE:AIR) has faced bearish sentiment from hedge fund managers, logic holds that there lies a certain "tier" of money managers that decided to sell off their full holdings by the end of the third quarter. Interestingly, Israel Englander's Millennium Management sold off the largest position of all the hedgies tracked by Insider Monkey, valued at about $9.7 million in stock, and Ken Griffin's Citadel Investment Group was right behind this move, as the fund dumped about $4.5 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds by the end of the third quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as AAR Corp. (NYSE:AIR) but similarly valued. These stocks are Comstock Resources Inc (NYSE:CRK), National Research Corporation (NASDAQ:NRC), Supernus Pharmaceuticals Inc (NASDAQ:SUPN), and Instructure, Inc. (NYSE:INST). 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 CRK,5,3783,1 NRC,9,49867,0 SUPN,16,88106,0 INST,17,522274,-4 Average,11.75,166008,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $166 million. That figure was $139 million in AIR's case. Instructure, Inc. (NYSE:INST) is the most popular stock in this table. On the other hand Comstock Resources Inc (NYSE:CRK) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks AAR Corp. (NYSE:AIR) is more popular among hedge funds. 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. Hedge funds were also right about betting on AIR, though not to the same extent, as the stock returned 8.6% during the fourth quarter (through the end of November) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.