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Hedge Funds Have Never Been Less Bullish On Kinder Morgan Inc (KMI)

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Kinder Morgan Inc (NYSE:KMI).

Is Kinder Morgan Inc (NYSE:KMI) a superb investment today? Money managers are becoming less confident. The number of bullish hedge fund bets decreased by 4 lately. Our calculations also showed that KMI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
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.

Andrew Raab FPR Partners Andy Raab

Andrew Raab of FPR Partners

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. Let’s view the latest hedge fund action encompassing Kinder Morgan Inc (NYSE:KMI).

What does smart money think about Kinder Morgan Inc (NYSE:KMI)?

At Q3’s end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from one quarter earlier. On the other hand, there were a total of 50 hedge funds with a bullish position in KMI a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

KMI_dec2019

Among these funds, FPR Partners held the most valuable stake in Kinder Morgan Inc (NYSE:KMI), which was worth $555.2 million at the end of the third quarter. On the second spot was First Pacific Advisors which amassed $322 million worth of shares. Abrams Capital Management, Renaissance Technologies, and Citadel Investment Group 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 FPR Partners allocated the biggest weight to Kinder Morgan Inc (NYSE:KMI), around 12.69% of its portfolio. Claar Advisors is also relatively very bullish on the stock, setting aside 7.21 percent of its 13F equity portfolio to KMI.

Since Kinder Morgan Inc (NYSE:KMI) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of hedgies that elected to cut their full holdings heading into Q4. Intriguingly, Brett Barakett’s Tremblant Capital dumped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, comprising about $20.9 million in stock. Ed Bosek’s fund, BeaconLight Capital, also sold off its stock, about $11.9 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 4 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to Kinder Morgan Inc (NYSE:KMI). We will take a look at L3Harris Technologies, Inc. (NYSE:LHX), American Electric Power Company, Inc. (NYSE:AEP), Lloyds Banking Group PLC (NYSE:LYG), and Applied Materials, Inc. (NASDAQ:AMAT). This group of stocks’ market valuations are closest to KMI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LHX 48 2486967 18
AEP 31 1768736 4
LYG 7 52469 -1
AMAT 50 2356178 6
Average 34 1666088 6.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $1666 million. That figure was $1468 million in KMI’s case. Applied Materials, Inc. (NASDAQ:AMAT) 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. Kinder Morgan Inc (NYSE:KMI) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately KMI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KMI investors were disappointed as the stock returned -3.7% 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.

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