In this article we are going to use hedge fund sentiment as a tool and determine whether The Kroger Co. (NYSE:KR) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is KR a good stock to buy? The Kroger Co. (NYSE:KR) investors should pay attention to a decrease in hedge fund sentiment of late. The Kroger Co. (NYSE:KR) was in 35 hedge funds’ portfolios at the end of September. The all time high for this statistic is 46. Our calculations also showed that KR 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.
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 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 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.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis 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. Now we’re going to analyze the fresh hedge fund action encompassing The Kroger Co. (NYSE:KR).
Do Hedge Funds Think KR Is A Good Stock To Buy Now?
At the end of the third quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the second quarter of 2020. Below, you can check out the change in hedge fund sentiment towards KR over the last 21 quarters. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Renaissance Technologies has the number one position in The Kroger Co. (NYSE:KR), worth close to $987.7 million, accounting for 1% of its total 13F portfolio. The second most bullish fund manager is Berkshire Hathaway, managed by Warren Buffett, which holds a $847 million position; 0.4% of its 13F portfolio is allocated to the stock. Some other members of the smart money with similar optimism consist of Cliff Asness’s AQR Capital Management, Noam Gottesman’s GLG Partners and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital. In terms of the portfolio weights assigned to each position Game Creek Capital allocated the biggest weight to The Kroger Co. (NYSE:KR), around 5.1% of its 13F portfolio. Navellier & Associates is also relatively very bullish on the stock, setting aside 1.07 percent of its 13F equity portfolio to KR.
Judging by the fact that The Kroger Co. (NYSE:KR) has faced a decline in interest from the smart money, we can see that there exists a select few fund managers who were dropping their positions entirely by the end of the third quarter. Interestingly, George McCabe’s Portolan Capital Management dropped the biggest stake of the “upper crust” of funds watched by Insider Monkey, comprising about $7 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund cut about $5.6 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 6 funds by the end of the third quarter.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as The Kroger Co. (NYSE:KR) but similarly valued. These stocks are American Water Works Company, Inc. (NYSE:AWK), HP Inc. (NYSE:HPQ), Consolidated Edison, Inc. (NYSE:ED), Parker-Hannifin Corporation (NYSE:PH), Liberty Broadband Corp (NASDAQ:LBRDK), NIO Limited (NYSE:NIO), and Microchip Technology Incorporated (NASDAQ:MCHP). This group of stocks’ market valuations are closest to KR’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 38.1 hedge funds with bullish positions and the average amount invested in these stocks was $1490 million. That figure was $2470 million in KR’s case. Liberty Broadband Corp (NASDAQ:LBRDK) is the most popular stock in this table. On the other hand Consolidated Edison, Inc. (NYSE:ED) is the least popular one with only 18 bullish hedge fund positions. The Kroger Co. (NYSE:KR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for KR is 44.2. 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 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and surpassed the market again by 16.4 percentage points. Unfortunately KR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KR investors were disappointed as the stock returned -8.5% since the end of September (through 12/18) 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.