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 Kaiser Aluminum Corporation (NASDAQ:KALU).
Is Kaiser Aluminum Corporation (NASDAQ:KALU) undervalued? Prominent investors are selling. The number of bullish hedge fund positions were cut by 4 recently. Our calculations also showed that KALU isn't among the 30 most popular stocks among hedge funds (see the video below). KALU was in 15 hedge funds' portfolios at the end of the second quarter of 2019. There were 19 hedge funds in our database with KALU holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. Let's analyze the key hedge fund action surrounding Kaiser Aluminum Corporation (NASDAQ:KALU).
What have hedge funds been doing with Kaiser Aluminum Corporation (NASDAQ:KALU)?
At the end of the second quarter, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards KALU over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
The largest stake in Kaiser Aluminum Corporation (NASDAQ:KALU) was held by Renaissance Technologies, which reported holding $32.1 million worth of stock at the end of March. It was followed by GLG Partners with a $23.2 million position. Other investors bullish on the company included Fisher Asset Management, Citadel Investment Group, and Winton Capital Management.
Judging by the fact that Kaiser Aluminum Corporation (NASDAQ:KALU) has faced declining sentiment from the aggregate hedge fund industry, it's safe to say that there is a sect of fund managers that decided to sell off their positions entirely heading into Q3. Interestingly, Chuck Royce's Royce & Associates said goodbye to the largest stake of all the hedgies followed by Insider Monkey, comprising close to $12.4 million in stock, and Minhua Zhang's Weld Capital Management was right behind this move, as the fund sold off about $0.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds heading into Q3.
Let's also examine hedge fund activity in other stocks similar to Kaiser Aluminum Corporation (NASDAQ:KALU). We will take a look at The RMR Group Inc. (NASDAQ:RMR), Universal Corporation (NYSE:UVV), Dillard's, Inc. (NYSE:DDS), and Mueller Water Products, Inc. (NYSE:MWA). This group of stocks' market valuations are similar to KALU's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RMR,22,206825,2 UVV,18,118445,1 DDS,20,207603,-8 MWA,18,246157,0 Average,19.5,194758,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $195 million. That figure was $110 million in KALU's case. The RMR Group Inc. (NASDAQ:RMR) is the most popular stock in this table. On the other hand Universal Corporation (NYSE:UVV) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Kaiser Aluminum Corporation (NASDAQ:KALU) is even less popular than UVV. 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. A small number of hedge funds were also right about betting on KALU, though not to the same extent, as the stock returned 2% during the third quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.