You probably know from experience that there is not as much information on small-cap companies as there is on large companies. Of course, this makes it really hard and difficult for individual investors to make proper and accurate analysis of certain small-cap companies. However, well-known and successful hedge fund managers like Jeff Ubben, George Soros and Seth Klarman hold the necessary resources and abilities to conduct an extensive stock analysis on small-cap stocks, which enable them to make millions of dollars by identifying potential winners within the small-cap galaxy of stocks. This represents the main reason why Insider Monkey takes notice of the hedge fund activity in these overlooked stocks.
Is AAR Corp. (NYSE:AIR) undervalued? The smart money is in a bearish mood. The number of bullish hedge fund positions were trimmed by 8 recently. Our calculations also showed that AIR isn't among the 30 most popular stocks among hedge funds. AIR was in 14 hedge funds' portfolios at the end of December. There were 22 hedge funds in our database with AIR positions at the end of the previous quarter.
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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/caption]
Let's review the fresh hedge fund action encompassing AAR Corp. (NYSE:AIR).
How have hedgies been trading AAR Corp. (NYSE:AIR)?
At the end of the fourth quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -36% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in AIR a year ago. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Ken Fisher's Fisher Asset Management has the largest position in AAR Corp. (NYSE:AIR), worth close to $38.5 million, comprising 0.1% of its total 13F portfolio. On Fisher Asset Management's heels is Carl Goldsmith and Scott Klein of Beach Point Capital Management, with a $18.3 million position; the fund has 5.3% of its 13F portfolio invested in the stock. Remaining peers with similar optimism consist of Mario Gabelli's GAMCO Investors, Noam Gottesman's GLG Partners and Cliff Asness's AQR Capital Management.
Since AAR Corp. (NYSE:AIR) has experienced falling interest from hedge fund managers, it's easy to see that there is a sect of fund managers who were dropping their positions entirely heading into Q3. Intriguingly, Paul Marshall and Ian Wace's Marshall Wace LLP dropped the biggest stake of the "upper crust" of funds followed by Insider Monkey, comprising about $15.6 million in stock. Ken Griffin's fund, Citadel Investment Group, also sold off its stock, about $10.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 8 funds heading into Q3.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as AAR Corp. (NYSE:AIR) but similarly valued. We will take a look at Gray Television, Inc. (NYSE:GTN), Oi SA (NYSE:OIBR), Asbury Automotive Group, Inc. (NYSE:ABG), and Ferro Corporation (NYSE:FOE). This group of stocks' market valuations match AIR's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GTN,26,215224,4 OIBR,21,380286,2 ABG,16,185184,-1 FOE,19,210568,1 Average,20.5,247816,1.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $248 million. That figure was $76 million in AIR's case. Gray Television, Inc. (NYSE:GTN) is the most popular stock in this table. On the other hand Asbury Automotive Group, Inc. (NYSE:ABG) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks AAR Corp. (NYSE:AIR) is even less popular than ABG. Hedge funds dodged a bullet by taking a bearish stance towards AIR. Our calculations showed that the top 15 most popular hedge fund stocks returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately AIR wasn't nearly as popular as these 15 stock (hedge fund sentiment was very bearish); AIR investors were disappointed as the stock returned -13.1% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.