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Were Hedge Funds Right About Axalta Coating Systems Ltd (AXTA)?

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. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Axalta Coating Systems Ltd (NYSE:AXTA)? The smart money sentiment can provide an answer to this question.

Axalta Coating Systems Ltd (NYSE:AXTA) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 60 hedge funds’ portfolios at the end of the fourth quarter of 2019. At the end of this article we will also compare AXTA to other stocks including Five Below Inc (NASDAQ:FIVE), Cabot Oil & Gas Corporation (NYSE:COG), and Dynatrace, Inc. (NYSE:DT) to get a better sense of its popularity.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

BRIDGEWATER ASSOCIATES

Ray Dalio of Bridgewater Associates

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). 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. With all of this in mind let’s take a look at the recent hedge fund action encompassing Axalta Coating Systems Ltd (NYSE:AXTA).

How are hedge funds trading Axalta Coating Systems Ltd (NYSE:AXTA)?

Heading into the first quarter of 2020, a total of 60 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards AXTA over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

The largest stake in Axalta Coating Systems Ltd (NYSE:AXTA) was held by Berkshire Hathaway, which reported holding $737.6 million worth of stock at the end of September. It was followed by Diamond Hill Capital with a $231.9 million position. Other investors bullish on the company included Renaissance Technologies, Millennium Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position DPM Capital allocated the biggest weight to Axalta Coating Systems Ltd (NYSE:AXTA), around 5.77% of its 13F portfolio. JANA Partners is also relatively very bullish on the stock, setting aside 4.01 percent of its 13F equity portfolio to AXTA.

Seeing as Axalta Coating Systems Ltd (NYSE:AXTA) has faced a decline in interest from the aggregate hedge fund industry, logic holds that there exists a select few fund managers who were dropping their positions entirely by the end of the third quarter. Interestingly, Daniel S. Och’s OZ Management dropped the biggest position of the “upper crust” of funds watched by Insider Monkey, worth an estimated $85.9 million in stock, and Benjamin Pass’s TOMS Capital was right behind this move, as the fund said goodbye to about $39.9 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to Axalta Coating Systems Ltd (NYSE:AXTA). These stocks are Five Below Inc (NASDAQ:FIVE), Cabot Oil & Gas Corporation (NYSE:COG), Dynatrace, Inc. (NYSE:DT), and East West Bancorp, Inc. (NASDAQ:EWBC). This group of stocks’ market values resemble AXTA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FIVE 42 614848 5
COG 34 460767 -6
DT 25 614519 5
EWBC 29 520620 -1
Average 32.5 552689 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $553 million. That figure was $1990 million in AXTA’s case. Five Below Inc (NASDAQ:FIVE) is the most popular stock in this table. On the other hand Dynatrace, Inc. (NYSE:DT) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks Axalta Coating Systems Ltd (NYSE:AXTA) is more popular among hedge funds. 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 lost 1.0% in 2020 through April 20th and still beat the market by 11 percentage points. Unfortunately AXTA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AXTA were disappointed as the stock returned -42.9% during the three months of 2020 (through April 20th) 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 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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