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Were Hedge Funds Right About AAR Corp. (AIR)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is AAR Corp. (NYSE:AIR), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is AAR Corp. (NYSE:AIR) ready to rally soon? The smart money is in a bullish mood. The number of long hedge fund positions inched up by 3 recently. Our calculations also showed that AIR isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). AIR was in 23 hedge funds’ portfolios at the end of December. There were 20 hedge funds in our database with AIR holdings at the end of the previous quarter.

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 41 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.

Mario Gabelli of GAMCO Investors

We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. 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 S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to go over the latest hedge fund action regarding AAR Corp. (NYSE:AIR).

What have hedge funds been doing with AAR Corp. (NYSE:AIR)?

At the end of the fourth quarter, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AIR over the last 18 quarters. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

More specifically, Fisher Asset Management was the largest shareholder of AAR Corp. (NYSE:AIR), with a stake worth $36.6 million reported as of the end of September. Trailing Fisher Asset Management was Columbus Circle Investors, which amassed a stake valued at $33.4 million. GAMCO Investors, Beach Point Capital Management, and AQR Capital Management 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 Beach Point Capital Management allocated the biggest weight to AAR Corp. (NYSE:AIR), around 6.8% of its 13F portfolio. Columbus Circle Investors is also relatively very bullish on the stock, designating 1.44 percent of its 13F equity portfolio to AIR.

As one would reasonably expect, key money managers were breaking ground themselves. Citadel Investment Group, managed by Ken Griffin, assembled the most valuable position in AAR Corp. (NYSE:AIR). Citadel Investment Group had $1 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also made a $0.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Qing Li’s Sciencast Management, Schonfeld Strategic Advisors, and David Harding’s Winton Capital Management.

Let’s now review hedge fund activity in other stocks similar to AAR Corp. (NYSE:AIR). We will take a look at Moelis & Company (NYSE:MC), Arbor Realty Trust, Inc. (NYSE:ABR), Youdao, Inc. (NYSE:DAO), and Chesapeake Utilities Corporation (NYSE:CPK). This group of stocks’ market valuations are closest to AIR’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MC 13 82176 -5
ABR 21 116544 7
DAO 3 3663 3
CPK 8 35601 -1
Average 11.25 59496 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $124 million in AIR’s case. Arbor Realty Trust, Inc. (NYSE:ABR) is the most popular stock in this table. On the other hand Youdao, Inc. (NYSE:DAO) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks AAR Corp. (NYSE:AIR) is more popular among hedge funds. 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 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th and still beat the market by 4.2 percentage points. Unfortunately AIR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AIR were disappointed as the stock returned -61.6% during the three months of 2020 (through April 6th) 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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