Did Hedge Funds Drop The Ball On Arconic Inc. (ARNC) ?

Is Arconic Inc. (NYSE:ARNC) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Arconic Inc. (NYSE:ARNC) investors should be aware of a decrease in hedge fund sentiment recently. ARNC was in 34 hedge funds’ portfolios at the end of September. There were 42 hedge funds in our database with ARNC positions at the end of the previous quarter. Our calculations also showed that ARNC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a gander at the fresh hedge fund action surrounding Arconic Inc. (NYSE:ARNC).

What have hedge funds been doing with Arconic Inc. (NYSE:ARNC)?

At Q3’s end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 40 hedge funds with a bullish position in ARNC a year ago. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Paul Singer’s Elliott Management has the largest position in Arconic Inc. (NYSE:ARNC), worth close to $1.0807 billion, corresponding to 9% of its total 13F portfolio. Sitting at the No. 2 spot is First Pacific Advisors, managed by Robert Rodriguez and Steven Romick, which holds a $649 million position; the fund has 6.1% of its 13F portfolio invested in the stock. Remaining peers that are bullish comprise William B. Gray’s Orbis Investment Management, David E. Shaw’s D E Shaw and Michael Lowenstein’s Kensico Capital. In terms of the portfolio weights assigned to each position Elliott Management allocated the biggest weight to Arconic Inc. (NYSE:ARNC), around 9% of its portfolio. First Pacific Advisors is also relatively very bullish on the stock, designating 6.11 percent of its 13F equity portfolio to ARNC.

Due to the fact that Arconic Inc. (NYSE:ARNC) has faced falling interest from hedge fund managers, it’s easy to see that there was a specific group of hedgies who sold off their positions entirely by the end of the third quarter. Intriguingly, John Orrico’s Water Island Capital dumped the largest investment of the 750 funds followed by Insider Monkey, totaling about $43.4 million in stock, and Zach Schreiber’s Point State Capital was right behind this move, as the fund cut about $10.3 million worth. These moves are important to note, as aggregate hedge fund interest fell by 8 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to Arconic Inc. (NYSE:ARNC). We will take a look at Yandex NV (NASDAQ:YNDX), FMC Corporation (NYSE:FMC), InterContinental Hotels Group PLC (NYSE:IHG), and Western Midstream Partners, LP (NYSE:WES). All of these stocks’ market caps are closest to ARNC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $434 million. That figure was $3137 million in ARNC’s case. FMC Corporation (NYSE:FMC) is the most popular stock in this table. On the other hand InterContinental Hotels Group PLC (NYSE:IHG) is the least popular one with only 7 bullish hedge fund positions. Arconic Inc. (NYSE:ARNC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on ARNC as the stock returned 19.2% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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