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Hedge Funds Are Selling The Kroger Co. (KR)

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought The Kroger Co. (NYSE:KR) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

The Kroger Co. (NYSE:KR) investors should be aware of a decrease in hedge fund sentiment in recent months. The Kroger Co. (NYSE:KR) was in 41 hedge funds’ portfolios at the end of June. The all time high for this statistics is 46. Our calculations also showed that KR isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 56 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 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.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s analyze the latest hedge fund action regarding The Kroger Co. (NYSE:KR).

How are hedge funds trading The Kroger Co. (NYSE:KR)?

At the end of June, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards KR over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is KR A Good Stock To Buy?

The largest stake in The Kroger Co. (NYSE:KR) was held by Renaissance Technologies, which reported holding $887.3 million worth of stock at the end of September. It was followed by Berkshire Hathaway with a $742.7 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and GLG Partners. In terms of the portfolio weights assigned to each position Game Creek Capital allocated the biggest weight to The Kroger Co. (NYSE:KR), around 5.93% of its 13F portfolio. Southport Management is also relatively very bullish on the stock, earmarking 3.8 percent of its 13F equity portfolio to KR.

Because The Kroger Co. (NYSE:KR) has experienced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of hedgies that decided to sell off their positions entirely heading into Q3. Interestingly, Dmitry Balyasny’s Balyasny Asset Management dropped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, comprising close to $57.3 million in stock, and Brandon Haley’s Holocene Advisors was right behind this move, as the fund dumped about $39.9 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 2 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as The Kroger Co. (NYSE:KR) but similarly valued. These stocks are Microchip Technology Incorporated (NASDAQ:MCHP), Lloyds Banking Group PLC (NYSE:LYG), Franco-Nevada Corporation (NYSE:FNV), Manulife Financial Corporation (NYSE:MFC), AutoZone, Inc. (NYSE:AZO), Yum! Brands, Inc. (NYSE:YUM), and Republic Services, Inc. (NYSE:RSG). All of these stocks’ market caps resemble KR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MCHP 33 890574 -5
LYG 7 14116 -2
FNV 23 1374566 2
MFC 19 171076 -1
AZO 55 2395499 10
YUM 47 1633184 6
RSG 37 821669 5
Average 31.6 1042955 2.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.6 hedge funds with bullish positions and the average amount invested in these stocks was $1043 million. That figure was $2362 million in KR’s case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 7 bullish hedge fund positions. The Kroger Co. (NYSE:KR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KR is 65.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately KR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KR were disappointed as the stock returned 6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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