How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Hexcel Corporation (NYSE:HXL) and determine whether hedge funds had an edge regarding this stock.
Is Hexcel Corporation (NYSE:HXL) going to take off soon? Prominent investors were becoming less confident. The number of bullish hedge fund positions dropped by 3 lately. Our calculations also showed that HXL 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).
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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a gander at the fresh hedge fund action regarding Hexcel Corporation (NYSE:HXL).
What does smart money think about Hexcel Corporation (NYSE:HXL)?
At Q1’s end, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HXL over the last 18 quarters. With hedge funds’ sentiment swirling, there exists a few notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Among these funds, Eagle Capital Management held the most valuable stake in Hexcel Corporation (NYSE:HXL), which was worth $78.4 million at the end of the third quarter. On the second spot was Alpine Associates which amassed $19.8 million worth of shares. Two Sigma Advisors, LMR Partners, and Renaissance Technologies 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 LMR Partners allocated the biggest weight to Hexcel Corporation (NYSE:HXL), around 1.28% of its 13F portfolio. Alpine Associates is also relatively very bullish on the stock, designating 0.79 percent of its 13F equity portfolio to HXL.
Judging by the fact that Hexcel Corporation (NYSE:HXL) has witnessed declining sentiment from the smart money, we can see that there was a specific group of money managers who were dropping their entire stakes in the first quarter. Interestingly, Cliff Asness’s AQR Capital Management sold off the biggest investment of all the hedgies monitored by Insider Monkey, totaling about $14 million in stock. Noam Gottesman’s fund, GLG Partners, also said goodbye to its stock, about $8.1 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 3 funds in the first quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Hexcel Corporation (NYSE:HXL) but similarly valued. These stocks are Strategic Education Inc (NASDAQ:STRA), Grocery Outlet Holding Corp. (NASDAQ:GO), SiteOne Landscape Supply, Inc. (NYSE:SITE), and Intercorp Financial Services Inc. (NYSE:IFS). This group of stocks’ market caps match HXL’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $113 million. That figure was $187 million in HXL’s case. SiteOne Landscape Supply, Inc. (NYSE:SITE) is the most popular stock in this table. On the other hand Intercorp Financial Services Inc. (NYSE:IFS) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Hexcel Corporation (NYSE:HXL) 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 gained 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on HXL, though not to the same extent, as the stock returned 21.6% in Q2 and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.