Was The Smart Money Right About Alcoa Corporation (AA)?

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 823 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 Alcoa Corporation (NYSE:AA).

Alcoa Corporation (NYSE:AA) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 33 hedge funds’ portfolios at the end of the second quarter of 2020. Our calculations also showed that AA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare AA to other stocks including First Majestic Silver Corp (NYSE:AG), The Goodyear Tire & Rubber Company (NASDAQ:GT), and Palomar Holdings, Inc. (NASDAQ:PLMR) to get a better sense of its popularity.

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 56 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 scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest insurance companies to identify fast growing companies in various industries. 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 to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a look at the latest hedge fund action regarding Alcoa Corporation (NYSE:AA).

What does smart money think about Alcoa Corporation (NYSE:AA)?

At the end of the second quarter, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AA over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Alcoa Corporation (NYSE:AA) was held by Orbis Investment Management, which reported holding $124.7 million worth of stock at the end of June. It was followed by Renaissance Technologies with a $46.8 million position. Other investors bullish on the company included Arrowstreet Capital, Two Sigma Advisors, and Fisher Asset Management. In terms of the portfolio weights assigned to each position Lion Point allocated the biggest weight to Alcoa Corporation (NYSE:AA), around 4.63% of its 13F portfolio. Elm Ridge Capital is also relatively very bullish on the stock, designating 3.38 percent of its 13F equity portfolio to AA.

Due to the fact that Alcoa Corporation (NYSE:AA) has experienced bearish sentiment from hedge fund managers, we can see that there were a few fund managers that decided to sell off their entire stakes by the end of the second quarter. At the top of the heap, Phill Gross and Robert Atchinson’s Adage Capital Management sold off the biggest investment of the “upper crust” of funds followed by Insider Monkey, valued at close to $9.2 million in stock, and Guru Ramakrishnan’s Meru Capital was right behind this move, as the fund cut about $3.2 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Alcoa Corporation (NYSE:AA). We will take a look at First Majestic Silver Corp (NYSE:AG), The Goodyear Tire & Rubber Company (NASDAQ:GT), Palomar Holdings, Inc. (NASDAQ:PLMR), Guangshen Railway Co. Ltd (NYSE:GSH), Altra Industrial Motion Corp. (NASDAQ:AIMC), Plexus Corp. (NASDAQ:PLXS), and APi Group Corporation (NYSE:APG). This group of stocks’ market values resemble AA’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $216 million. That figure was $402 million in AA’s case. APi Group Corporation (NYSE:APG) is the most popular stock in this table. On the other hand Guangshen Railway Co. Ltd (NYSE:GSH) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Alcoa Corporation (NYSE:AA) is more popular among hedge funds. Our overall hedge fund sentiment score for AA is 76.5. 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 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 returned 23% in 2020 through October 30th but still managed to beat the market by 20.1 percentage points. Hedge funds were also right about betting on AA as the stock returned 14.9% since the end of June (through 10/30) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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