How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Arcosa, Inc. (NYSE:ACA).
Arcosa, Inc. (NYSE:ACA) shareholders have witnessed a decrease in enthusiasm from smart money in recent months. ACA was in 24 hedge funds’ portfolios at the end of June. There were 25 hedge funds in our database with ACA positions at the end of the previous quarter. Our calculations also showed that ACA isn’t among the 30 most popular stocks among hedge funds (see the video below).
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a look at the fresh hedge fund action regarding Arcosa, Inc. (NYSE:ACA).
What does smart money think about Arcosa, Inc. (NYSE:ACA)?
At Q2’s end, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ACA over the last 16 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
More specifically, ValueAct Capital was the largest shareholder of Arcosa, Inc. (NYSE:ACA), with a stake worth $159.6 million reported as of the end of March. Trailing ValueAct Capital was Royce & Associates, which amassed a stake valued at $40.8 million. Yacktman Asset Management, Ancora Advisors, and Winton Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Arcosa, Inc. (NYSE:ACA) has faced falling interest from hedge fund managers, logic holds that there were a few fund managers that decided to sell off their full holdings in the second quarter. Intriguingly, Noam Gottesman’s GLG Partners cut the biggest position of the 750 funds watched by Insider Monkey, comprising close to $2.1 million in stock, and David Costen Haley’s HBK Investments was right behind this move, as the fund dumped about $1.1 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 1 funds in the second quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Arcosa, Inc. (NYSE:ACA) but similarly valued. These stocks are Golar LNG Limited (NASDAQ:GLNG), Cott Corporation (NYSE:COT), Core-Mark Holding Company, Inc. (NASDAQ:CORE), and 21Vianet Group Inc (NASDAQ:VNET). This group of stocks’ market valuations are closest to ACA’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $222 million. That figure was $329 million in ACA’s case. Cott Corporation (NYSE:COT) is the most popular stock in this table. On the other hand 21Vianet Group Inc (NASDAQ:VNET) is the least popular one with only 17 bullish hedge fund positions. Arcosa, Inc. (NYSE:ACA) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ACA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ACA were disappointed as the stock returned -9% during the third 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.