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Was The Smart Money Right About Kellogg Company (K)?

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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Melvin Capital's recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Kellogg Company (NYSE:K).

Kellogg Company (NYSE:K) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 32 hedge funds' portfolios at the end of June. Our calculations also showed that K isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Paycom Software Inc (NYSE:PAYC), Western Digital Corporation (NASDAQ:WDC), and Royal Caribbean Cruises Ltd. (NYSE:RCL) to gather more data points.

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. Hedge funds have more than $3.5 trillion in assets under management, so you can't expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 79 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds' moves today.

David Harding
David Harding

David Harding of Winton Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let's view the recent hedge fund action surrounding Kellogg Company (NYSE:K).

Do Hedge Funds Think K Is A Good Stock To Buy Now?

At the end of June, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards K over the last 24 quarters. With hedgies' sentiment swirling, there exists a few key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

The largest stake in Kellogg Company (NYSE:K) was held by Alkeon Capital Management, which reported holding $128.7 million worth of stock at the end of June. It was followed by Arrowstreet Capital with a $113.6 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Bridgewater Associates. In terms of the portfolio weights assigned to each position Factorial Partners allocated the biggest weight to Kellogg Company (NYSE:K), around 1.91% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, earmarking 0.54 percent of its 13F equity portfolio to K.

Because Kellogg Company (NYSE:K) has witnessed declining sentiment from the entirety of the hedge funds we track, it's safe to say that there exists a select few money managers that elected to cut their full holdings by the end of the second quarter. At the top of the heap, Clint Carlson's Carlson Capital sold off the largest stake of the 750 funds followed by Insider Monkey, totaling an estimated $4.9 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also cut its stock, about $3.7 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Kellogg Company (NYSE:K) but similarly valued. We will take a look at Paycom Software Inc (NYSE:PAYC), Western Digital Corporation (NASDAQ:WDC), Royal Caribbean Cruises Ltd. (NYSE:RCL), Dover Corporation (NYSE:DOV), Caesars Entertainment Inc. (NASDAQ:CZR), Xylem Inc (NYSE:XYL), and Fox Corporation (NASDAQ:FOXA). This group of stocks' market valuations resemble K's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PAYC,39,1149714,-7 WDC,57,2114351,-1 RCL,42,596573,0 DOV,29,700034,3 CZR,73,1839888,-3 XYL,23,931677,0 FOXA,35,441270,-3 Average,42.6,1110501,-1.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.6 hedge funds with bullish positions and the average amount invested in these stocks was $1111 million. That figure was $483 million in K's case. Caesars Entertainment Inc. (NASDAQ:CZR) is the most popular stock in this table. On the other hand Xylem Inc (NYSE:XYL) is the least popular one with only 23 bullish hedge fund positions. Kellogg Company (NYSE:K) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for K is 38.6. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and surpassed the market again by 3.1 percentage points. Unfortunately K wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); K investors were disappointed as the stock returned -1.9% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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