Is Kansas City Southern (KSU) A Good Stock To Buy Now?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Kansas City Southern (NYSE:KSU).

Is Kansas City Southern (KSU) a good stock to buy now? KSU was in 53 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 47. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. KSU shareholders have witnessed an increase in enthusiasm from smart money recently. There were 47 hedge funds in our database with KSU positions at the end of the second quarter. Our calculations also showed that KSU isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.


Richard Chilton of Chilton Investment Company

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 15 best blue chip stocks to buy 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind let’s take a glance at the recent hedge fund action encompassing Kansas City Southern (NYSE:KSU).

How are hedge funds trading Kansas City Southern (NYSE:KSU)?

At Q3’s end, a total of 53 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. By comparison, 33 hedge funds held shares or bullish call options in KSU 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.

More specifically, Millennium Management was the largest shareholder of Kansas City Southern (NYSE:KSU), with a stake worth $136.3 million reported as of the end of September. Trailing Millennium Management was Chilton Investment Company, which amassed a stake valued at $106.3 million. Fisher Asset Management, Impala Asset Management, and Farallon Capital 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 Impala Asset Management allocated the biggest weight to Kansas City Southern (NYSE:KSU), around 7.36% of its 13F portfolio. Mountain Road Advisors is also relatively very bullish on the stock, setting aside 7.13 percent of its 13F equity portfolio to KSU.

As industrywide interest jumped, key money managers were leading the bulls’ herd. Farallon Capital, established the largest position in Kansas City Southern (NYSE:KSU). Farallon Capital had $71.2 million invested in the company at the end of the quarter. Richard Gerson and Navroz D. Udwadia’s Falcon Edge Capital also made a $68.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management, Carl Tiedemann and Michael Tiedemann’s TIG Advisors, and Gregg Moskowitz’s Interval Partners.

Let’s check out hedge fund activity in other stocks similar to Kansas City Southern (NYSE:KSU). These stocks are CDW Corporation (NASDAQ:CDW), Citrix Systems, Inc. (NASDAQ:CTXS), Fox Corporation (NASDAQ:FOX), Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY), Check Point Software Technologies Ltd. (NASDAQ:CHKP), NatWest Group plc (NYSE:NWG), and Grifols SA (NASDAQ:GRFS). This group of stocks’ market valuations resemble KSU’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CDW 30 1334920 -10
CTXS 31 643896 -5
FOX 15 579708 -5
ALNY 35 902645 -3
CHKP 27 820557 -1
NWG 2 2622 -3
GRFS 18 366113 -3
Average 22.6 664352 -4.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.6 hedge funds with bullish positions and the average amount invested in these stocks was $664 million. That figure was $1074 million in KSU’s case. Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) is the most popular stock in this table. On the other hand NatWest Group plc (NYSE:NWG) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Kansas City Southern (NYSE:KSU) is more popular among hedge funds. Our overall hedge fund sentiment score for KSU is 90. 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. 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 percentage points. These stocks gained 31.6% in 2020 through December 2nd and still beat the market by 16 percentage points. Unfortunately KSU wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KSU were disappointed as the stock returned 4.7% since the end of the third quarter (through 12/2) 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 most of these stocks already outperformed the market in 2020.

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