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 Kinder Morgan Inc (NYSE: KMI) and determine whether hedge funds had an edge regarding this stock.
Kinder Morgan Inc (NYSE: KMI) shareholders have witnessed an increase in enthusiasm from smart money lately. Kinder Morgan Inc (NYSE: KMI) was in 50 hedge funds’ portfolios at the end of June. The all time high for this statistics is 49. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that KMI 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.
At the moment there are a multitude of gauges stock market investors put to use to size up stocks. A duo of the less known gauges are hedge fund and insider trading moves. We have shown that, historically, those who follow the best picks of the top investment managers can outclass the broader indices by a significant amount (see the details here).
David Abrams of Abrams Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America to pick the best large-cap 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s take a gander at the new hedge fund action encompassing Kinder Morgan Inc (NYSE: KMI).
What have hedge funds been doing with Kinder Morgan Inc (NYSE:KMI)?
At Q2’s end, a total of 50 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in KMI over the last 20 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).
The largest stake in Kinder Morgan Inc (NYSE:KMI) was held by FPR Partners, which reported holding $236 million worth of stock at the end of September. It was followed by First Pacific Advisors LLC with a $225.6 million position. Other investors bullish on the company included Abrams Capital Management, D E Shaw, and AQR Capital Management. In terms of the portfolio weights assigned to each position FPR Partners allocated the biggest weight to Kinder Morgan Inc (NYSE:KMI), around 8.21% of its 13F portfolio. Quaker Capital Investments is also relatively very bullish on the stock, dishing out 6.66 percent of its 13F equity portfolio to KMI.
As aggregate interest increased, some big names have jumped into Kinder Morgan Inc (NYSE:KMI) headfirst. Kettle Hill Capital Management, managed by Andrew Kurita, established the biggest position in Kinder Morgan Inc (NYSE:KMI). Kettle Hill Capital Management had $16.2 million invested in the company at the end of the quarter. Mark G. Schoeppner’s Quaker Capital Investments also made a $14.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Wayne Cooperman’s Cobalt Capital Management, Clint Carlson’s Carlson Capital, and Matt Smith’s Deep Basin Capital.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Kinder Morgan Inc (NYSE:KMI) but similarly valued. We will take a look at Sempra Energy (NYSE: SRE), Snap Inc. (NYSE: SNAP), The Bank of New York Mellon Corporation (NYSE: BK), Bank of Montreal (NYSE: BMO), Constellation Brands, Inc. (NYSE: STZ), Thomson Reuters Corporation (NYSE: TRI), and Banco Bradesco SA (NYSE: BBD). This group of stocks’ market valuations resemble KMI’s market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SRE,35,635290,8 SNAP,49,1601957,1 BK,48,4431288,-4 BMO,13,107019,0 STZ,53,1653433,3 TRI,25,440519,3 BBD,18,235952,3 Average,34.4,1300780,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 34.4 hedge funds with bullish positions and the average amount invested in these stocks was $1301 million. That figure was $1091 million in KMI’s case. Constellation Brands, Inc. (NYSE: STZ) is the most popular stock in this table. On the other hand Bank of Montreal (NYSE: BMO) is the least popular one with only 13 bullish hedge fund positions. Kinder Morgan Inc (NYSE:KMI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KMI is 84.3. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately KMI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KMI were disappointed as the stock returned -7.2% 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 many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.