Alcoa Corporation (AA): Hedge Funds In Wait-and-See Mode

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Alcoa Corporation (NYSE:AA) based on that data and determine whether they were really smart about the stock.

Hedge fund interest in Alcoa Corporation (NYSE:AA) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that AA 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). 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 First Majestic Silver Corp (NYSE:AG), The Goodyear Tire & Rubber Company (NASDAQ:GT), and Palomar Holdings, Inc. (NASDAQ:PLMR) to gather more data points. Our calculations also showed that AA 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.

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 56 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.

Jack Ripsteen Tim Ripsteen Potrero Capital

Jack Ripsteen of Potrero Capital Research

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world 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. Keeping this in mind let’s take a peek at the fresh hedge fund action surrounding Alcoa Corporation (NYSE:AA).

What does smart money think about Alcoa Corporation (NYSE:AA)?

At the end of the second quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AA over the last 20 quarters. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Among these funds, Orbis Investment Management held the most valuable stake in Alcoa Corporation (NYSE:AA), which was worth $124.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $46.8 million worth of shares. Arrowstreet Capital, Two Sigma Advisors, and Fisher Asset Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Lion Point allocated the biggest weight to Alcoa Corporation (NYSE:AA), around 4.63% of its 13F portfolio. Elm Ridge Capital is also relatively very bullish on the stock, dishing out 3.38 percent of its 13F equity portfolio to AA.

Seeing as Alcoa Corporation (NYSE:AA) has faced declining sentiment from hedge fund managers, it’s easy to see that there is a sect of funds that elected to cut their full holdings last quarter. It’s worth mentioning that Phill Gross and Robert Atchinson’s Adage Capital Management sold off the biggest investment of the 750 funds followed by Insider Monkey, comprising about $9.2 million in stock. Guru Ramakrishnan’s fund, Meru Capital, also cut its stock, about $3.2 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Alcoa Corporation (NYSE:AA). We will take a look at First Majestic Silver Corp (NYSE:AG), The Goodyear Tire & Rubber Company (NASDAQ:GT), Palomar Holdings, Inc. (NASDAQ:PLMR), Guangshen Railway Co. Ltd (NYSE:GSH), Altra Industrial Motion Corp. (NASDAQ:AIMC), Plexus Corp. (NASDAQ:PLXS), and APi Group Corporation (NYSE:APG). This group of stocks’ market valuations are similar to AA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AG 14 106404 1
GT 21 184571 -5
PLMR 15 76145 8
GSH 1 3274 -1
AIMC 12 100558 -3
PLXS 15 72081 -1
APG 27 965610 27
Average 15 215520 3.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $216 million. That figure was $402 million in AA’s case. APi Group Corporation (NYSE:APG) is the most popular stock in this table. On the other hand Guangshen Railway Co. Ltd (NYSE:GSH) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Alcoa Corporation (NYSE:AA) is more popular among hedge funds. Our overall hedge fund sentiment score for AA 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 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on AA as the stock returned 30.1% since the end of June 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.