It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Adient plc (NYSE:ADNT). Adient is an auto parts manufacturer (mainly car seats (see easiest and safest car seats to install)) that was extremely popular among hedge funds in 2017.
Anthony Bozza’s Lakewood Capital talked about Adient in its 2018 annual investor letter. Here is what Bozza said:
Adient, which I discussed originally in our fourth quarter 2016 letter, continued to sell off into year-end as a company-specific issue (losses in its metals business) was compounded by weakness in the global auto parts industry during the quarter. We knew 2018 would be challenging for the company, but we clearly underestimated the order of magnitude of the issues and the market’s harsh reaction to the operational setbacks. Between share sales at much higher prices and the decline in the stock, the fund currently has only a modest-sized position in the company. If the company gets back on track, the upside will be enormous, but of course, prolonged challenges will continue to pose risks due to the low-margin nature of the business and a levered balance sheet. While Adient was unquestionably the most disappointing outcome of 2018, the fund’s inception-to-date loss on the position remains below 100bps.
Is Adient plc (NYSE:ADNT) a healthy stock for your portfolio? The smart money is becoming more confident. The number of bullish hedge fund bets increased by 7 lately. Our calculations also showed that ADNT 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.
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.
Clifton Robbins of Blue Harbour Group
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 Adient plc (NYSE:ADNT).
How are hedge funds trading Adient plc (NYSE:ADNT)?
At Q3’s end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 39% from the previous quarter. On the other hand, there were a total of 29 hedge funds with a bullish position in ADNT a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Blue Harbour Group was the largest shareholder of Adient plc (NYSE:ADNT), with a stake worth $150.4 million reported as of the end of September. Trailing Blue Harbour Group was Lyrical Asset Management, which amassed a stake valued at $108.5 million. Greenlight Capital, Cyrus Capital Partners, and Newtyn 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 Blue Harbour Group allocated the biggest weight to Adient plc (NYSE:ADNT), around 8.82% of its portfolio. Cyrus Capital Partners is also relatively very bullish on the stock, setting aside 6.71 percent of its 13F equity portfolio to ADNT.
Consequently, specific money managers have been driving this bullishness. Newtyn Management, managed by Noah Levy and Eugene Dozortsev, initiated the most outsized call position in Adient plc (NYSE:ADNT). Newtyn Management had $23 million invested in the company at the end of the quarter. Curtis Schenker and Craig Effron’s Scoggin also made a $5.3 million investment in the stock during the quarter. The other funds with new positions in the stock are Lee Ainslie’s Maverick Capital, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Louis Bacon’s Moore Global Investments.
Let’s check out hedge fund activity in other stocks similar to Adient plc (NYSE:ADNT). These stocks are Otter Tail Corporation (NASDAQ:OTTR), Tri Pointe Group Inc (NYSE:TPH), LegacyTexas Financial Group Inc (NASDAQ:LTXB), and Pretium Resources Inc (NYSE:PVG). This group of stocks’ market values match ADNT’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OTTR | 14 | 79670 | 2 |
| TPH | 24 | 230367 | 7 |
| LTXB | 10 | 92773 | -5 |
| PVG | 22 | 121252 | 0 |
| Average | 17.5 | 131016 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $590 million in ADNT’s case. Tri Pointe Group Inc (NYSE:TPH) is the most popular stock in this table. On the other hand LegacyTexas Financial Group Inc (NASDAQ:LTXB) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Adient plc (NYSE:ADNT) is more popular among hedge funds. 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. Unfortunately ADNT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ADNT were disappointed as the stock returned -4.8% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
