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Were Hedge Funds Right About The Coca-Cola Company (KO)?

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. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing 835 13F filings submitted by hedge funds and prominent investors. These filings show these funds’ portfolio positions as of December 31st, 2019. In this article we are going to take a look at smart money sentiment towards The Coca-Cola Company (NYSE:KO).

The Coca-Cola Company (NYSE:KO) has experienced a decrease in support from the world’s most elite money managers in recent months. KO was in 51 hedge funds’ portfolios at the end of December. There were 56 hedge funds in our database with KO positions at the end of the previous quarter. Our calculations also showed that KO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 S&P 500 ETFs by more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Donald Yacktman of Yacktman Asset Management

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let’s take a gander at the key hedge fund action regarding The Coca-Cola Company (NYSE:KO).

What have hedge funds been doing with The Coca-Cola Company (NYSE:KO)?

At Q4’s end, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards KO over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Warren Buffett’s Berkshire Hathaway has the biggest position in The Coca-Cola Company (NYSE:KO), worth close to $22.14 billion, amounting to 9.1% of its total 13F portfolio. The second most bullish fund manager is Yacktman Asset Management, managed by Donald Yacktman, which holds a $521.1 million position; 6.6% of its 13F portfolio is allocated to the stock. Some other professional money managers that are bullish include Phill Gross and Robert Atchinson’s Adage Capital Management, Ken Griffin’s Citadel Investment Group and Panayotis Takis Sparaggis’s Alkeon Capital Management. In terms of the portfolio weights assigned to each position Berkshire Hathaway allocated the biggest weight to The Coca-Cola Company (NYSE:KO), around 9.15% of its 13F portfolio. Yacktman Asset Management is also relatively very bullish on the stock, earmarking 6.59 percent of its 13F equity portfolio to KO.

Since The Coca-Cola Company (NYSE:KO) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of fund managers who were dropping their full holdings in the third quarter. Interestingly, Rajiv Jain’s GQG Partners said goodbye to the largest position of the 750 funds tracked by Insider Monkey, totaling an estimated $216.3 million in stock, and Anand Parekh’s Alyeska Investment Group was right behind this move, as the fund cut about $35.2 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 5 funds in the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Coca-Cola Company (NYSE:KO) but similarly valued. We will take a look at Merck & Co., Inc. (NYSE:MRK), Chevron Corporation (NYSE:CVX), Wells Fargo & Company (NYSE:WFC), and Pfizer Inc. (NYSE:PFE). This group of stocks’ market caps are similar to KO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MRK 77 5164143 -3
CVX 47 2391610 -6
WFC 79 23878918 12
PFE 62 4838507 4
Average 66.25 9068295 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 66.25 hedge funds with bullish positions and the average amount invested in these stocks was $9068 million. That figure was $23797 million in KO’s case. Wells Fargo & Company (NYSE:WFC) is the most popular stock in this table. On the other hand Chevron Corporation (NYSE:CVX) is the least popular one with only 47 bullish hedge fund positions. The Coca-Cola Company (NYSE:KO) is not the least popular stock in this group but hedge fund interest is still below average. 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately KO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); KO investors were disappointed as the stock returned -16.9% during the same time period 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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