The market has been volatile in the last few months as the Federal Reserve continued its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q2 and the beginning of Q3. In this article, we analyze what the smart money thinks of The Coca-Cola Company (NYSE:KO) and find out how it is affected by hedge funds' moves.
The Coca-Cola Company (NYSE:KO) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 48 hedge funds' portfolios at the end of June. At the end of this article we will also compare KO to other stocks including Merck & Co., Inc. (NYSE:MRK), Intel Corporation (NASDAQ:INTC), and Wells Fargo & Company (NYSE:WFC) to get a better sense of its popularity.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to go over the recent hedge fund action surrounding The Coca-Cola Company (NYSE:KO).
Hedge fund activity in The Coca-Cola Company (NYSE:KO)
Heading into the third quarter of 2019, a total of 48 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 39 hedge funds with a bullish position in KO a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
More specifically, Berkshire Hathaway was the largest shareholder of The Coca-Cola Company (NYSE:KO), with a stake worth $20368 million reported as of the end of March. Trailing Berkshire Hathaway was Yacktman Asset Management, which amassed a stake valued at $666.5 million. Citadel Investment Group, Adage Capital Management, and Two Sigma Advisors were also very fond of the stock, giving the stock large weights in their portfolios.
Since The Coca-Cola Company (NYSE:KO) has experienced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there is a sect of hedgies that slashed their entire stakes heading into Q3. Interestingly, Benjamin A. Smith's Laurion Capital Management dropped the biggest position of the "upper crust" of funds monitored by Insider Monkey, valued at an estimated $7.9 million in stock. David Costen Haley's fund, HBK Investments, also dumped its stock, about $5.3 million worth. These transactions are interesting, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks similar to The Coca-Cola Company (NYSE:KO). These stocks are Merck & Co., Inc. (NYSE:MRK), Intel Corporation (NASDAQ:INTC), Wells Fargo & Company (NYSE:WFC), and Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM). All of these stocks' market caps are closest to KO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MRK,70,4860053,6 INTC,43,3500915,-19 WFC,65,25938800,-8 TSM,42,4239857,3 Average,55,9634906,-4.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 55 hedge funds with bullish positions and the average amount invested in these stocks was $9635 million. That figure was $22584 million in KO's case. Merck & Co., Inc. (NYSE:MRK) is the most popular stock in this table. On the other hand Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the least popular one with only 42 bullish hedge fund positions. The Coca-Cola Company (NYSE:KO) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on KO as the stock returned 7.7% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.