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 Ingredion Incorporated (NYSE:INGR) and determine whether hedge funds had an edge regarding this stock.
Is Ingredion Incorporated (NYSE:INGR) the right investment to pursue these days? Prominent investors were taking a pessimistic view. The number of long hedge fund positions fell by 5 in recent months. Our calculations also showed that INGR isn't among the 30 most popular stocks among hedge funds (click for Q1 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.
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' 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 58 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.
Ray Dalio of Bridgewater Associates
At Insider Monkey we scour multiple sources to uncover the next great investment idea. We go through lists like the 10 most profitable companies in America to pick the best large-cap 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we're going to take a peek at the fresh hedge fund action encompassing Ingredion Incorporated (NYSE:INGR).
What have hedge funds been doing with Ingredion Incorporated (NYSE:INGR)?
Heading into the second quarter of 2020, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -22% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards INGR over the last 18 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Ingredion Incorporated (NYSE:INGR) was held by AQR Capital Management, which reported holding $111.1 million worth of stock at the end of September. It was followed by D E Shaw with a $17.1 million position. Other investors bullish on the company included Renaissance Technologies, Citadel Investment Group, and Winton Capital Management. In terms of the portfolio weights assigned to each position Fondren Management allocated the biggest weight to Ingredion Incorporated (NYSE:INGR), around 2.49% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, designating 0.27 percent of its 13F equity portfolio to INGR.
Due to the fact that Ingredion Incorporated (NYSE:INGR) has experienced declining sentiment from the entirety of the hedge funds we track, we can see that there were a few hedgies that slashed their full holdings last quarter. It's worth mentioning that Paul Marshall and Ian Wace's Marshall Wace LLP dropped the largest position of all the hedgies monitored by Insider Monkey, totaling about $4.8 million in stock, and Donald Sussman's Paloma Partners was right behind this move, as the fund dumped about $1.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds last quarter.
Let's now review hedge fund activity in other stocks similar to Ingredion Incorporated (NYSE:INGR). These stocks are Aramark (NYSE:ARMK), Companhia de Saneamento Basico (NYSE:SBS), BorgWarner Inc. (NYSE:BWA), and Canopy Growth Corporation (NYSE:CGC). This group of stocks' market valuations match INGR's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ARMK,29,595601,-7 SBS,8,218391,-4 BWA,30,482313,3 CGC,10,30232,-4 Average,19.25,331634,-3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $332 million. That figure was $177 million in INGR's case. BorgWarner Inc. (NYSE:BWA) is the most popular stock in this table. On the other hand Companhia de Saneamento Basico (NYSE:SBS) is the least popular one with only 8 bullish hedge fund positions. Ingredion Incorporated (NYSE:INGR) is not the least popular stock in this group but hedge fund interest is still below average. 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 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 gained 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately INGR wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); INGR investors were disappointed as the stock returned 17.7% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.