American Airlines Group Inc (NASDAQ:AAL) is down 3.5% and Genuine Parts Company (NYSE:GPC) inched down by some 0.4% in the first hours of trading at a time when the broader market is in green, after earlier today Goldman Sachs had lowered its rating on American Airlines to ‘Neutral’ from ‘Buy’ and decreased its rating on Genuine Parts to ‘Sell’ from ‘Neutral’. Let’s take a closer look at the two stocks, and see if the smart money agrees with Goldman on their outlook.
We mention the hedge fund activity concerning American Airlines and Genuine Parts because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 60 percentage points (118% return vs. the S&P 500’s 57.6% gain) over the last 36 months (see the details here).
American Airlines Group Inc (NASDAQ:AAL)’s profits have soared as crude prices have fallen. Crude prices typically make up 30-35% of airline operational costs, but now make up 20% of costs, because crude prices are substantially lower. As one of the rare airlines that doesn’t hedge fuel costs, American Airlines has benefited enormously. The company reported record profits and is using them to repurchase shares and reinvest in its fleet.
While profits have risen, investors doubt their sustainability as industry capacity expands and American Airlines’ net operating losses are used up. Shares of American are down 26% year to date and trade at a forward P/E of 5.81.
Like Goldman and the market, hedge funds are becoming more cautious towards American Airlines Group Inc (NASDAQ:AAL). According to our data, 85 hedge funds owned $2.55 billion worth of the company’s stock (representing 9.2% of the float) at the end of June, down from 91 funds and $3.47 billion respectively a quarter earlier. According to the latest round of 13F filings, James Dinan’s York Capital Management owns 8.13 million shares as of the end of June, down by 3.28 million shares over the quarter, while James Dondero’s Highland Capital Management holds 4.32 million shares, down by 1.66 million shares compared to the previous quarter.
Shares of Genuine Parts Company (NYSE:GPC) are down 21% year-to-date amid the company missing revenue expectations for two quarters in a row. Despite a challenging sales environment, Genuine Parts has successfully strengthened its balance sheet and improved its cash flow. Shares now trade at a reasonable 16.2 times forward earnings and sport a 2.98% dividend yield.