Were Hedge Funds Right About The Kroger Co. (KR)?

In this article you are going to find out whether hedge funds think The Kroger Co. (NYSE:KR) 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.

The Kroger Co. (NYSE:KR) investors should be aware of a decrease in hedge fund interest recently. The Kroger Co. (NYSE:KR) was in 41 hedge funds’ portfolios at the end of June. The all time high for this statistics is 46. Our calculations also showed that KR 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth stocks to buy. 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 take a glance at the fresh hedge fund action encompassing The Kroger Co. (NYSE:KR).

What does smart money think about The Kroger Co. (NYSE:KR)?

At the end of the second quarter, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the previous quarter. On the other hand, there were a total of 28 hedge funds with a bullish position in KR a year ago. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

The largest stake in The Kroger Co. (NYSE:KR) was held by Renaissance Technologies, which reported holding $887.3 million worth of stock at the end of September. It was followed by Berkshire Hathaway with a $742.7 million position. Other investors bullish on the company included AQR Capital Management, Citadel Investment Group, and GLG Partners. In terms of the portfolio weights assigned to each position Game Creek Capital allocated the biggest weight to The Kroger Co. (NYSE:KR), around 5.93% of its 13F portfolio. Southport Management is also relatively very bullish on the stock, setting aside 3.8 percent of its 13F equity portfolio to KR.

Judging by the fact that The Kroger Co. (NYSE:KR) has experienced declining sentiment from the smart money, logic holds that there was a specific group of money managers who were dropping their entire stakes last quarter. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management said goodbye to the largest stake of the 750 funds followed by Insider Monkey, comprising an estimated $57.3 million in stock, and Brandon Haley’s Holocene Advisors was right behind this move, as the fund sold off about $39.9 million worth. These moves are interesting, as total hedge fund interest fell by 2 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to The Kroger Co. (NYSE:KR). We will take a look at Microchip Technology Incorporated (NASDAQ:MCHP), Lloyds Banking Group PLC (NYSE:LYG), Franco-Nevada Corporation (NYSE:FNV), Manulife Financial Corporation (NYSE:MFC), AutoZone, Inc. (NYSE:AZO), Yum! Brands, Inc. (NYSE:YUM), and Republic Services, Inc. (NYSE:RSG). This group of stocks’ market valuations are closest to KR’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.6 hedge funds with bullish positions and the average amount invested in these stocks was $1043 million. That figure was $2362 million in KR’s case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 7 bullish hedge fund positions. The Kroger Co. (NYSE:KR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KR is 65.2. 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 positive signal but 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately KR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KR were disappointed as the stock returned -2.7% since the end of June (through 10/23) 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 many of these stocks already outperformed the market so far this year.

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