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

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards Axalta Coating Systems Ltd (NYSE:AXTA) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Axalta Coating Systems Ltd (NYSE:AXTA) an excellent stock to buy now? The best stock pickers were reducing their bets on the stock. The number of long hedge fund bets fell by 11 lately. Our calculations also showed that AXTA 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). AXTA was in 49 hedge funds’ portfolios at the end of the first quarter of 2020. There were 60 hedge funds in our database with AXTA holdings at the end of the previous quarter.

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

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Clint Carlson of Carlson Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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 look at the fresh hedge fund action regarding Axalta Coating Systems Ltd (NYSE:AXTA).

What have hedge funds been doing with Axalta Coating Systems Ltd (NYSE:AXTA)?

Heading into the second quarter of 2020, a total of 49 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -18% from the fourth quarter of 2019. By comparison, 43 hedge funds held shares or bullish call options in AXTA a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AXTA A Good Stock To Buy?

More specifically, Berkshire Hathaway was the largest shareholder of Axalta Coating Systems Ltd (NYSE:AXTA), with a stake worth $415.7 million reported as of the end of September. Trailing Berkshire Hathaway was Rivulet Capital, which amassed a stake valued at $120.3 million. Diamond Hill Capital, JANA 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 Clearfield Capital allocated the biggest weight to Axalta Coating Systems Ltd (NYSE:AXTA), around 8.19% of its 13F portfolio. JANA Partners is also relatively very bullish on the stock, earmarking 7.72 percent of its 13F equity portfolio to AXTA.

Due to the fact that Axalta Coating Systems Ltd (NYSE:AXTA) has experienced declining sentiment from hedge fund managers, it’s easy to see that there lies a certain “tier” of hedgies that elected to cut their positions entirely heading into Q4. It’s worth mentioning that Bob Peck and Andy Raab’s FPR Partners dropped the largest stake of the 750 funds followed by Insider Monkey, totaling an estimated $72 million in stock, and Eric W. Mandelblatt and Gaurav Kapadia’s Soroban Capital Partners was right behind this move, as the fund sold off about $59.2 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 11 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Axalta Coating Systems Ltd (NYSE:AXTA) but similarly valued. These stocks are Eastgroup Properties Inc (NYSE:EGP), Solaredge Technologies Inc (NASDAQ:SEDG), LogMeIn Inc (NASDAQ:LOGM), and Anaplan, Inc. (NYSE:PLAN). This group of stocks’ market values are similar to AXTA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EGP 13 36375 3
SEDG 27 264038 -1
LOGM 28 759486 -3
PLAN 51 1608189 -6
Average 29.75 667022 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $667 million. That figure was $1106 million in AXTA’s case. Anaplan, Inc. (NYSE:PLAN) is the most popular stock in this table. On the other hand Eastgroup Properties Inc (NYSE:EGP) is the least popular one with only 13 bullish hedge fund positions. Axalta Coating Systems Ltd (NYSE:AXTA) is not the most popular stock in this group but hedge fund interest is still above average. 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 beat the market by 15.5 percentage points. Hedge funds were also right about betting on AXTA as the stock returned 30.6% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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