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Should You Buy Kellogg Company (K)?

In this article we will check out the progression of hedge fund sentiment towards Kellogg Company (NYSE:K) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Kellogg Company (NYSE:K) worth your attention right now? Hedge funds are in a bullish mood. The number of bullish hedge fund bets moved up by 7 recently. Our calculations also showed that K isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). K was in 37 hedge funds’ portfolios at the end of the first quarter of 2020. There were 30 hedge funds in our database with K positions at the end of the previous quarter.

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 51 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.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s take a look at the fresh hedge fund action regarding Kellogg Company (NYSE:K).

Hedge fund activity in Kellogg Company (NYSE:K)

At Q1’s end, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 23% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in K over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in Kellogg Company (NYSE:K), which was worth $206 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $128.3 million worth of shares. Diamond Hill Capital, Pzena Investment Management, and GAMCO Investors 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 Factorial Partners allocated the biggest weight to Kellogg Company (NYSE:K), around 2.58% of its 13F portfolio. Cognios Capital is also relatively very bullish on the stock, dishing out 0.92 percent of its 13F equity portfolio to K.

As industrywide interest jumped, specific money managers were breaking ground themselves. Diamond Hill Capital, managed by Ric Dillon, initiated the largest position in Kellogg Company (NYSE:K). Diamond Hill Capital had $86.6 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $10.4 million position during the quarter. The other funds with brand new K positions are Lee Ainslie’s Maverick Capital, Mark Coe’s Intrinsic Edge Capital, and Ray Dalio’s Bridgewater Associates.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Kellogg Company (NYSE:K) but similarly valued. We will take a look at Waste Connections, Inc. (NYSE:WCN), Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), Cummins Inc. (NYSE:CMI), and Liberty Broadband Corp (NASDAQ:LBRDK). All of these stocks’ market caps are similar to K’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WCN 33 464735 -4
BBVA 8 142085 0
CMI 34 326816 -5
LBRDK 45 3334060 -1
Average 30 1066924 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $1067 million. That figure was $611 million in K’s case. Liberty Broadband Corp (NASDAQ:LBRDK) is the most popular stock in this table. On the other hand Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) is the least popular one with only 8 bullish hedge fund positions. Kellogg Company (NYSE:K) 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 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 8.3% in 2020 through the end of May but beat the market by 13.2 percentage points. Unfortunately K wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on K were disappointed as the stock returned 9.8% 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.