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Was The Smart Money Right About Axalta Coating Systems Ltd (AXTA)?

Reymerlyn Martin
·6 min read

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Axalta Coating Systems Ltd (NYSE:AXTA).

Is Axalta Coating Systems Ltd (NYSE:AXTA) the right investment to pursue these days? Investors who are in the know were selling. The number of long hedge fund positions retreated by 2 in recent months. Axalta Coating Systems Ltd (NYSE:AXTA) was in 47 hedge funds' portfolios at the end of June. The all time high for this statistics is 60. Our calculations also showed that AXTA 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

John Petry Sessa Capital
John Petry Sessa Capital

John Petry of Sessa Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's view the fresh hedge fund action surrounding Axalta Coating Systems Ltd (NYSE:AXTA).

Hedge fund activity in Axalta Coating Systems Ltd (NYSE:AXTA)

At the end of the second quarter, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AXTA over the last 20 quarters. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

The largest stake in Axalta Coating Systems Ltd (NYSE:AXTA) was held by Berkshire Hathaway, which reported holding $542.8 million worth of stock at the end of September. It was followed by Rivulet Capital with a $130.3 million position. Other investors bullish on the company included Citadel Investment Group, Diamond Hill Capital, and Eminence Capital. In terms of the portfolio weights assigned to each position Atlantic Investment Management allocated the biggest weight to Axalta Coating Systems Ltd (NYSE:AXTA), around 13.1% of its 13F portfolio. Rivulet Capital is also relatively very bullish on the stock, designating 8.49 percent of its 13F equity portfolio to AXTA.

Due to the fact that Axalta Coating Systems Ltd (NYSE:AXTA) has witnessed a decline in interest from the smart money, it's safe to say that there exists a select few fund managers who sold off their entire stakes in the second quarter. It's worth mentioning that Jeffrey Gates's Gates Capital Management dumped the largest investment of all the hedgies tracked by Insider Monkey, worth an estimated $42 million in stock, and Philip Hilal's Clearfield Capital was right behind this move, as the fund said goodbye to about $12.1 million worth. These transactions are interesting, as total hedge fund interest was cut by 2 funds in the second quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Axalta Coating Systems Ltd (NYSE:AXTA) but similarly valued. These stocks are Nielsen Holdings plc (NYSE:NLSN), Comerica Incorporated (NYSE:CMA), PLDT Inc. (NYSE:PHI), Ralph Lauren Corporation (NYSE:RL), Ares Management Corp (NYSE:ARES), Churchill Downs Incorporated (NASDAQ:CHDN), and Sonoco Products Company (NYSE:SON). All of these stocks' market caps are similar to AXTA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NLSN,31,1177115,-2 CMA,36,423590,3 PHI,5,85702,-2 RL,25,499671,-1 ARES,20,448658,4 CHDN,25,470037,-6 SON,25,128777,2 Average,23.9,461936,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.9 hedge funds with bullish positions and the average amount invested in these stocks was $462 million. That figure was $1340 million in AXTA's case. Comerica Incorporated (NYSE:CMA) is the most popular stock in this table. On the other hand PLDT Inc. (NYSE:PHI) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Axalta Coating Systems Ltd (NYSE:AXTA) is more popular among hedge funds. Our overall hedge fund sentiment score for AXTA is 76.5. 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. 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 returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on AXTA as the stock returned 18.7% since the end of June (through 10/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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Disclosure: None. This article was originally published at Insider Monkey.

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