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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Air Lease Corp (NYSE:AL) and determine whether hedge funds had an edge regarding this stock.
Air Lease Corp (NYSE:AL) has experienced an increase in hedge fund interest in recent months. Air Lease Corp (NYSE:AL) was in 22 hedge funds' portfolios at the end of June. The all time high for this statistics is 33. Our calculations also showed that AL 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).
Video: Watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Chuck Royce of Royce & Associates
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 precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. 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. Now let's take a look at the latest hedge fund action surrounding Air Lease Corp (NYSE:AL).
How have hedgies been trading Air Lease Corp (NYSE:AL)?
At second quarter's end, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from one quarter earlier. By comparison, 18 hedge funds held shares or bullish call options in AL a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Windacre Partnership, managed by Snehal Amin, holds the largest position in Air Lease Corp (NYSE:AL). Windacre Partnership has a $372.2 million position in the stock, comprising 11.2% of its 13F portfolio. Coming in second is Lyrical Asset Management, managed by Andrew Wellington and Jeff Keswin, which holds a $103.8 million position; 2% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors that are bullish contain Chuck Royce's Royce & Associates, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Matthew Lindenbaum's Basswood Capital. In terms of the portfolio weights assigned to each position Windacre Partnership allocated the biggest weight to Air Lease Corp (NYSE:AL), around 11.18% of its 13F portfolio. Lyrical Asset Management is also relatively very bullish on the stock, designating 2.05 percent of its 13F equity portfolio to AL.
With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. Steamboat Capital Partners, managed by Parsa Kiai, created the largest position in Air Lease Corp (NYSE:AL). Steamboat Capital Partners had $10.3 million invested in the company at the end of the quarter. Donald Sussman's Paloma Partners also made a $4 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Algert and Kevin Coldiron's Algert Coldiron Investors, Michael Gelband's ExodusPoint Capital, and Paul Tudor Jones's Tudor Investment Corp.
Let's now review hedge fund activity in other stocks similar to Air Lease Corp (NYSE:AL). We will take a look at PennyMac Financial Services Inc (NYSE:PFSI), ADC Therapeutics SA (NYSE:ADCT), MasTec, Inc. (NYSE:MTZ), Colfax Corporation (NYSE:CFX), Quaker Chemical Corp (NYSE:KWR), OneMain Holdings Inc (NYSE:OMF), and Medpace Holdings, Inc. (NASDAQ:MEDP). All of these stocks' market caps are closest to AL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PFSI,25,351948,1 ADCT,15,490195,15 MTZ,29,160492,5 CFX,39,607479,7 KWR,13,159316,5 OMF,37,342546,3 MEDP,22,220276,5 Average,25.7,333179,5.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.7 hedge funds with bullish positions and the average amount invested in these stocks was $333 million. That figure was $619 million in AL's case. Colfax Corporation (NYSE:CFX) is the most popular stock in this table. On the other hand Quaker Chemical Corp (NYSE:KWR) is the least popular one with only 13 bullish hedge fund positions. Air Lease Corp (NYSE:AL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for AL is 44.3. 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 AL wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); AL investors were disappointed as the stock returned 0.9% 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.