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We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Trinity Industries, Inc. (NYSE:TRN) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Trinity Industries, Inc. (NYSE:TRN) has experienced an increase in hedge fund sentiment lately. Our calculations also showed that TRN isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
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Jeffrey Ubben of ValueAct Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now let's take a glance at the key hedge fund action regarding Trinity Industries, Inc. (NYSE:TRN).
What does smart money think about Trinity Industries, Inc. (NYSE:TRN)?
At Q4's end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from one quarter earlier. By comparison, 27 hedge funds held shares or bullish call options in TRN a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Jeffrey Ubben's ValueAct Capital has the most valuable position in Trinity Industries, Inc. (NYSE:TRN), worth close to $551.3 million, accounting for 5.6% of its total 13F portfolio. Sitting at the No. 2 spot is Omega Advisors, managed by Leon Cooperman, which holds a $62.9 million position; 3.3% of its 13F portfolio is allocated to the company. Remaining professional money managers that are bullish encompass Amy Minella's Cardinal Capital, Israel Englander's Millennium Management and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position Madison Avenue Partners allocated the biggest weight to Trinity Industries, Inc. (NYSE:TRN), around 18.42% of its 13F portfolio. StackLine Partners is also relatively very bullish on the stock, dishing out 10.59 percent of its 13F equity portfolio to TRN.
As industrywide interest jumped, specific money managers have been driving this bullishness. Madison Avenue Partners, managed by Eli Samaha, created the most outsized position in Trinity Industries, Inc. (NYSE:TRN). Madison Avenue Partners had $21.4 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors also made a $0.9 million investment in the stock during the quarter. The other funds with brand new TRN positions are Qing Li's Sciencast Management, Ray Dalio's Bridgewater Associates, and Paul Tudor Jones's Tudor Investment Corp.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Trinity Industries, Inc. (NYSE:TRN) but similarly valued. These stocks are The Hain Celestial Group, Inc. (NASDAQ:HAIN), Cabot Corporation (NYSE:CBT), Rattler Midstream LP (NASDAQ:RTLR), and Lexington Realty Trust (NYSE:LXP). This group of stocks' market valuations resemble TRN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HAIN,17,708372,-3 CBT,29,139643,8 RTLR,8,116513,-3 LXP,14,61204,-1 Average,17,256433,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $256 million. That figure was $861 million in TRN's case. Cabot Corporation (NYSE:CBT) is the most popular stock in this table. On the other hand Rattler Midstream LP (NASDAQ:RTLR) is the least popular one with only 8 bullish hedge fund positions. Trinity Industries, Inc. (NYSE:TRN) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. Hedge funds were also right about betting on TRN, though not to the same extent, as the stock returned -21.1% during the first two and a half months of 2020 (through March 25th) and outperformed the market as well.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.