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We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Hexcel Corporation (NYSE:HXL) and determine whether hedge funds skillfully traded this stock.
Is Hexcel Corporation (NYSE:HXL) a bargain? Hedge funds were cutting their exposure. The number of long hedge fund positions dropped by 9 in recent months. Hexcel Corporation (NYSE:HXL) was in 18 hedge funds' portfolios at the end of June. The all time high for this statistics is 30. Our calculations also showed that HXL isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 27 hedge funds in our database with HXL positions at the end of the first quarter.
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 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 S&P 500 ETFs by 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 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.
Boykin Curry of Eagle Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind we're going to take a glance at the fresh hedge fund action encompassing Hexcel Corporation (NYSE:HXL).
How are hedge funds trading Hexcel Corporation (NYSE:HXL)?
Heading into the third quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HXL over the last 20 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Hexcel Corporation (NYSE:HXL) was held by Eagle Capital Management, which reported holding $108.8 million worth of stock at the end of September. It was followed by AQR Capital Management with a $31.6 million position. Other investors bullish on the company included Two Sigma Advisors, Fairpointe Capital, and MFP Investors. In terms of the portfolio weights assigned to each position Cloverdale Capital Management allocated the biggest weight to Hexcel Corporation (NYSE:HXL), around 3.02% of its 13F portfolio. Fairpointe Capital is also relatively very bullish on the stock, dishing out 2.65 percent of its 13F equity portfolio to HXL.
Since Hexcel Corporation (NYSE:HXL) has faced bearish sentiment from hedge fund managers, it's easy to see that there were a few fund managers who were dropping their full holdings in the second quarter. Interestingly, Robert Emil Zoellner's Alpine Associates dropped the largest stake of the "upper crust" of funds followed by Insider Monkey, valued at close to $19.8 million in stock. Ben Levine, Andrew Manuel and Stefan Renold's fund, LMR Partners, also said goodbye to its stock, about $15.4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 9 funds in the second quarter.
Let's check out hedge fund activity in other stocks similar to Hexcel Corporation (NYSE:HXL). We will take a look at SL Green Realty Corp (NYSE:SLG), Cannae Holdings, Inc. (NYSE:CNNE), Cloudera, Inc. (NYSE:CLDR), Ballard Power Systems Inc. (NASDAQ:BLDP), Novanta Inc. (NASDAQ:NOVT), Portland General Electric Company (NYSE:POR), and Perspecta Inc. (NYSE:PRSP). This group of stocks' market values are closest to HXL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SLG,26,258760,3 CNNE,43,596426,23 CLDR,33,855546,7 BLDP,16,76980,6 NOVT,18,103718,8 POR,21,164563,-2 PRSP,46,653988,14 Average,29,387140,8.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $387 million. That figure was $231 million in HXL's case. Perspecta Inc. (NYSE:PRSP) is the most popular stock in this table. On the other hand Ballard Power Systems Inc. (NASDAQ:BLDP) is the least popular one with only 16 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. Our overall hedge fund sentiment score for HXL is 17.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 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 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately HXL wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HXL investors were disappointed as the stock returned -25.8% in the third 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.