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Hedge Funds Are Selling Kellogg Company (K)

Reymerlyn Martin

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds' and successful investors' positions as of the end of the second quarter. You can find articles about an individual hedge fund's trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Kellogg Company (NYSE:K) based on that data and determine whether they were really smart about the stock.

Is Kellogg Company (NYSE:K) a buy here? Money managers were in a pessimistic mood. The number of bullish hedge fund bets were trimmed by 4 lately. Kellogg Company (NYSE:K) was in 33 hedge funds' portfolios at the end of June. The all time high for this statistics is 39. Our calculations also showed that K 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Richard Pzena - Pzena Investment Management
Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we're going to review the new hedge fund action encompassing Kellogg Company (NYSE:K).

What have hedge funds been doing with Kellogg Company (NYSE:K)?

At second quarter's end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. By comparison, 28 hedge funds held shares or bullish call options in K a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of Kellogg Company (NYSE:K), with a stake worth $185.1 million reported as of the end of September. Trailing Renaissance Technologies was Pzena Investment Management, which amassed a stake valued at $59.7 million. Arrowstreet Capital, Citadel Investment Group, and Diamond Hill Capital 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 Kehrs Ridge Capital allocated the biggest weight to Kellogg Company (NYSE:K), around 5.53% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, designating 1.56 percent of its 13F equity portfolio to K.

Judging by the fact that Kellogg Company (NYSE:K) has witnessed a decline in interest from hedge fund managers, logic holds that there exists a select few hedgies that slashed their entire stakes by the end of the second quarter. At the top of the heap, Paul Marshall and Ian Wace's Marshall Wace LLP cut the biggest stake of all the hedgies watched by Insider Monkey, worth close to $3.7 million in stock, and Dmitry Balyasny's Balyasny Asset Management was right behind this move, as the fund dumped about $3.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 4 funds by the end of the second quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Kellogg Company (NYSE:K) but similarly valued. We will take a look at Incyte Corporation (NASDAQ:INCY), Tencent Music Entertainment Group (NYSE:TME), Liberty Broadband Corp (NASDAQ:LBRDA), Liberty Broadband Corp (NASDAQ:LBRDK), Best Buy Co., Inc. (NYSE:BBY), State Street Corporation (NYSE:STT), and BioMarin Pharmaceutical Inc. (NASDAQ:BMRN). This group of stocks' market values are similar to K's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position INCY,29,4432332,-11 TME,30,538341,5 LBRDA,22,718343,-4 LBRDK,58,3372154,13 BBY,33,1062886,-4 STT,36,668259,2 BMRN,45,2005739,-9 Average,36.1,1828293,-1.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.1 hedge funds with bullish positions and the average amount invested in these stocks was $1828 million. That figure was $418 million in K's case. Liberty Broadband Corp (NASDAQ:LBRDK) is the most popular stock in this table. On the other hand Liberty Broadband Corp (NASDAQ:LBRDA) is the least popular one with only 22 bullish hedge fund positions. Kellogg Company (NYSE:K) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for K is 41.7. 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 33% in 2020 through the end of August and surpassed the market by 23.2 percentage points. Unfortunately K wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); K investors were disappointed as the stock returned 8.2% since Q2 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.

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