Were Hedge Funds Right About Dumping Kellogg Company (K)?

In this article you are going to find out whether hedge funds think Kellogg Company (NYSE:K) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Kellogg Company (NYSE:K) was in 33 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 39. K has seen a decrease in activity from the world’s largest hedge funds in recent months. There were 37 hedge funds in our database with K positions at the end of the first quarter. Our calculations also showed that K 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.

CITADEL INVESTMENT GROUP

Ken Griffin of Citadel Investment Group

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 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. 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. Now we’re going to check out the new hedge fund action regarding Kellogg Company (NYSE:K).

What does smart money think about Kellogg Company (NYSE:K)?

At second quarter’s end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in K over the last 20 quarters. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of Kellogg Company (NYSE:K), with a stake worth $185.1 million reported as of the end of June. Trailing Renaissance Technologies was Pzena Investment Management, which amassed a stake valued at $59.7 million. Arrowstreet Capital, Citadel Investment Group, and Diamond Hill Capital 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 Kehrs Ridge Capital allocated the biggest weight to Kellogg Company (NYSE:K), around 5.53% of its 13F portfolio. Factorial Partners is also relatively very bullish on the stock, dishing out 1.56 percent of its 13F equity portfolio to K.

Judging by the fact that Kellogg Company (NYSE:K) has faced falling interest from hedge fund managers, logic holds that there lies a certain “tier” of fund managers that slashed their positions entirely by the end of the second quarter. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the biggest investment of the 750 funds monitored by Insider Monkey, comprising an estimated $3.7 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund sold off about $3.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 4 funds by the end of the second quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Kellogg Company (NYSE:K) but similarly valued. These stocks are Incyte Corporation (NASDAQ:INCY), Tencent Music Entertainment Group (NYSE:TME), Liberty Broadband Corp (NASDAQ:LBRDA), Liberty Broadband Corp (NASDAQ:LBRDK), Best Buy Co., Inc. (NYSE:BBY), State Street Corporation (NYSE:STT), and BioMarin Pharmaceutical Inc. (NASDAQ:BMRN). This group of stocks’ market valuations match K’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INCY 29 4432332 -11
TME 30 538341 5
LBRDA 22 718343 -4
LBRDK 58 3372154 13
BBY 33 1062886 -4
STT 36 668259 2
BMRN 45 2005739 -9
Average 36.1 1828293 -1.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.1 hedge funds with bullish positions and the average amount invested in these stocks was $1828 million. That figure was $418 million in K’s case. Liberty Broadband Corp (NASDAQ:LBRDK) is the most popular stock in this table. On the other hand Liberty Broadband Corp (NASDAQ:LBRDA) is the least popular one with only 22 bullish hedge fund positions. Kellogg Company (NYSE:K) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for K is 41.7. 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 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately K wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); K investors were disappointed as the stock returned -4% since the end of June (through 10/30) 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.

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