Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like The Kroger Co. (NYSE:KR).
Is The Kroger Co. (NYSE:KR) a buy here? Money managers are getting less optimistic. The number of long hedge fund positions decreased by 3 in recent months. Our calculations also showed that KR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Cliff Asness of AQR Capital Management
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. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we’re going to view the key hedge fund action regarding The Kroger Co. (NYSE:KR).
What have hedge funds been doing with The Kroger Co. (NYSE:KR)?
Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the second quarter of 2019. On the other hand, there were a total of 30 hedge funds with a bullish position in KR a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, AQR Capital Management was the largest shareholder of The Kroger Co. (NYSE:KR), with a stake worth $230.6 million reported as of the end of September. Trailing AQR Capital Management was Renaissance Technologies, which amassed a stake valued at $114.6 million. Millennium Management, Citadel Investment Group, and Balyasny 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 Game Creek Capital allocated the biggest weight to The Kroger Co. (NYSE:KR), around 4.79% of its 13F portfolio. 683 Capital Partners is also relatively very bullish on the stock, dishing out 1.43 percent of its 13F equity portfolio to KR.
Judging by the fact that The Kroger Co. (NYSE:KR) has faced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there exists a select few funds who were dropping their entire stakes heading into Q4. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital said goodbye to the largest position of the “upper crust” of funds followed by Insider Monkey, comprising an estimated $31.8 million in call options. Mike Masters’s fund, Masters Capital Management, also cut its call options, about $21.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 3 funds heading into Q4.
Let’s also examine hedge fund activity in other stocks similar to The Kroger Co. (NYSE:KR). We will take a look at Weyerhaeuser Co. (NYSE:WY), Synopsys, Inc. (NASDAQ:SNPS), Spotify Technology S.A. (NYSE:SPOT), and Fresenius Medical Care AG & Co. (NYSE:FMS). All of these stocks’ market caps are closest to KR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| WY | 28 | 451903 | 0 |
| SNPS | 40 | 1362195 | -2 |
| SPOT | 37 | 1470342 | -5 |
| FMS | 5 | 3764 | -4 |
| Average | 27.5 | 822051 | -2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $822 million. That figure was $632 million in KR’s case. Synopsys, Inc. (NASDAQ:SNPS) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. (NYSE:FMS) is the least popular one with only 5 bullish hedge fund positions. The Kroger Co. (NYSE:KR) 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 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. Unfortunately KR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KR investors were disappointed as the stock returned 7.9% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
