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Axalta Coating Systems Ltd (AXTA): Hedge Funds Now In Wait-and-See Mode

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. We estimate that COVID-19 will kill around 5 million people worldwide and there is a 3.3% probability that Donald Trump will die from the new coronavirus (read the details). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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).

Hedge fund interest in Axalta Coating Systems Ltd (NYSE:AXTA) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Five Below Inc (NASDAQ:FIVE), Cabot Oil & Gas Corporation (NYSE:COG), and Dynatrace, Inc. (NYSE:DT) to gather more data points. Our calculations also showed that AXTA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Warren Buffett of Berkshire Hathaway

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Now let’s take a gander at the latest hedge fund action surrounding Axalta Coating Systems Ltd (NYSE:AXTA).

What have hedge funds been doing with Axalta Coating Systems Ltd (NYSE:AXTA)?

Heading into the first quarter of 2020, a total of 60 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in AXTA 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.

Is AXTA A Good Stock To Buy?

The largest stake in Axalta Coating Systems Ltd (NYSE:AXTA) was held by Berkshire Hathaway, which reported holding $737.6 million worth of stock at the end of September. It was followed by Diamond Hill Capital with a $231.9 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position DPM Capital allocated the biggest weight to Axalta Coating Systems Ltd (NYSE:AXTA), around 5.77% of its 13F portfolio. JANA Partners is also relatively very bullish on the stock, setting aside 4.01 percent of its 13F equity portfolio to AXTA.

Because Axalta Coating Systems Ltd (NYSE:AXTA) has witnessed falling interest from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of hedgies that slashed their full holdings in the third quarter. Intriguingly, Daniel S. Och’s OZ Management cut the biggest stake of the 750 funds watched by Insider Monkey, comprising an estimated $85.9 million in stock. Benjamin Pass’s fund, TOMS Capital, also sold off its stock, about $39.9 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now take a look at hedge fund activity in other stocks similar to Axalta Coating Systems Ltd (NYSE:AXTA). We will take a look at Five Below Inc (NASDAQ:FIVE), Cabot Oil & Gas Corporation (NYSE:COG), Dynatrace, Inc. (NYSE:DT), and East West Bancorp, Inc. (NASDAQ:EWBC). This group of stocks’ market values are closest to AXTA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FIVE 42 614848 5
COG 34 460767 -6
DT 25 614519 5
EWBC 29 520620 -1
Average 32.5 552689 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $553 million. That figure was $1990 million in AXTA’s case. Five Below Inc (NASDAQ:FIVE) is the most popular stock in this table. On the other hand Dynatrace, Inc. (NYSE:DT) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks Axalta Coating Systems Ltd (NYSE:AXTA) is more popular among hedge funds. 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 12.9% in 2020 through March 9th and still beat the market by 1.9 percentage points. Unfortunately AXTA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AXTA were disappointed as the stock returned -30.8% during the first two months of 2020 (through March 9th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.

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

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