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

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the fourth quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Axalta Coating Systems Ltd (NYSE:AXTA) changed recently.

Is Axalta Coating Systems Ltd (NYSE:AXTA) undervalued? Hedge funds are becoming less hopeful. The number of long hedge fund positions shrunk by 8 recently. Our calculations also showed that AXTA isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

Sander Gerber of Hudson Bay Capital

Let’s go over the new hedge fund action regarding Axalta Coating Systems Ltd (NYSE:AXTA).

What does the smart money think about Axalta Coating Systems Ltd (NYSE:AXTA)?

At Q4’s end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. By comparison, 43 hedge funds held shares or bullish call options in AXTA a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

AXTA_apr2019

The largest stake in Axalta Coating Systems Ltd (NYSE:AXTA) was held by Berkshire Hathaway, which reported holding $568.3 million worth of stock at the end of September. It was followed by Diamond Hill Capital with a $259.4 million position. Other investors bullish on the company included Deccan Value Advisors, Soroban Capital Partners, and Millennium Management.

Judging by the fact that Axalta Coating Systems Ltd (NYSE:AXTA) has faced declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there is a sect of hedge funds who were dropping their positions entirely by the end of the third quarter. Intriguingly, Jonathon Jacobson’s Highfields Capital Management cut the biggest stake of the 700 funds tracked by Insider Monkey, valued at close to $113.1 million in call options. Dmitry Balyasny’s fund, Balyasny Asset Management, also dumped its call options, about $103.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 8 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks similar to Axalta Coating Systems Ltd (NYSE:AXTA). These stocks are Harley-Davidson, Inc. (NYSE:HOG), Assurant, Inc. (NYSE:AIZ), Donaldson Company, Inc. (NYSE:DCI), and Companhia Brasileira de Distrib. (NYSE:CBD). This group of stocks’ market valuations are similar to AXTA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HOG 19 67612 -1
AIZ 31 360841 8
DCI 19 124101 2
CBD 13 79198 3
Average 20.5 157938 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $158 million. That figure was $1927 million in AXTA’s case. Assurant, Inc. (NYSE:AIZ) is the most popular stock in this table. On the other hand Companhia Brasileira de Distrib. (NYSE:CBD) is the least popular one with only 13 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately AXTA wasn’t in this group. Hedge funds that bet on AXTA were disappointed as the stock returned 15.7% and underperformed the market by a tiny margin. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.

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

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