U.S. Markets closed

Do Hedge Funds Love The Kroger Co. (KR)?

Nina Todic

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of The Kroger Co. (NYSE:KR).

The Kroger Co. (NYSE:KR) has experienced a decrease in activity from the world's largest hedge funds of late. Our calculations also showed that KR 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.

5 Most Popular Stocks Among Hedge Funds

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_256989" align="aligncenter" width="450"] Dmitry Balyasny of Balyasny Asset Managemnet[/caption]

Dmitry Balyasny of Balyasny Asset Managemnet

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. Let's take a look at the new hedge fund action surrounding The Kroger Co. (NYSE:KR).

What have hedge funds been doing with The Kroger Co. (NYSE:KR)?

At the end of the third quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KR over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with KR Positions

Among these funds, AQR Capital Management held the most valuable stake in The Kroger Co. (NYSE:KR), which was worth $230.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $114.6 million worth of shares. Millennium Management, Citadel Investment Group, and Balyasny Asset 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 Game Creek Capital allocated the biggest weight to The Kroger Co. (NYSE:KR), around 4.79% of its portfolio. 683 Capital Partners is also relatively very bullish on the stock, designating 1.43 percent of its 13F equity portfolio to KR.

Seeing as The Kroger Co. (NYSE:KR) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of hedgies that elected to cut their full holdings by the end of the third quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the largest position of the "upper crust" of funds followed by Insider Monkey, valued at an estimated $31.8 million in call options. Mike Masters's fund, Masters Capital Management, also sold off its call options, about $21.7 million worth. These transactions are important to note, as total hedge fund interest dropped by 3 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to The Kroger Co. (NYSE:KR). We will take a look at Weyerhaeuser Company (NYSE:WY), Synopsys, Inc. (NASDAQ:SNPS), Spotify Technology S.A. (NYSE:SPOT), and Fresenius Medical Care AG & Co. KGaA (NYSE:FMS). All of these stocks' market caps resemble KR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WY,28,451903,0 SNPS,40,1362195,-2 SPOT,37,1470342,-5 FMS,5,3764,-4 Average,27.5,822051,-2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $822 million. That figure was $632 million in KR's case. Synopsys, Inc. (NASDAQ:SNPS) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) is the least popular one with only 5 bullish hedge fund positions. The Kroger Co. (NYSE:KR) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on KR, though not to the same extent, as the stock returned 6.7% during the first two months of the fourth quarter and outperformed the market.

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

Related Content