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

Reymerlyn Martin
·7 min read

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 The Coca-Cola Company (NYSE:KO).

Is The Coca-Cola Company (NYSE:KO) worth your attention right now? Money managers were becoming more confident. The number of long hedge fund bets improved by 4 lately. The Coca-Cola Company (NYSE:KO) was in 59 hedge funds' portfolios at the end of June. The all time high for this statistics is 62. Our calculations also showed that KO 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.

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 56 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.

YORK CAPITAL MANAGEMENT
YORK CAPITAL MANAGEMENT

James Dinan of York Capital Management

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 most profitable companies in the world 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let's review the new hedge fund action encompassing The Coca-Cola Company (NYSE:KO).

How have hedgies been trading The Coca-Cola Company (NYSE:KO)?

At Q2's end, a total of 59 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards KO over the last 20 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Among these funds, Berkshire Hathaway held the most valuable stake in The Coca-Cola Company (NYSE:KO), which was worth $17872 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $327.1 million worth of shares. Two Sigma Advisors, D E Shaw, and Yacktman Asset Management 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 Berkshire Hathaway allocated the biggest weight to The Coca-Cola Company (NYSE:KO), around 8.83% of its 13F portfolio. Bronson Point Partners is also relatively very bullish on the stock, dishing out 7.44 percent of its 13F equity portfolio to KO.

Consequently, some big names were leading the bulls' herd. Candlestick Capital Management, managed by Jack Woodruff, established the most valuable position in The Coca-Cola Company (NYSE:KO). Candlestick Capital Management had $71.5 million invested in the company at the end of the quarter. Greg Poole's Echo Street Capital Management also made a $23.1 million investment in the stock during the quarter. The following funds were also among the new KO investors: James Dinan's York Capital Management, Jay Genzer's Thames Capital Management, and Matthew Hulsizer's PEAK6 Capital Management.

Let's go over hedge fund activity in other stocks similar to The Coca-Cola Company (NYSE:KO). These stocks are Exxon Mobil Corporation (NYSE:XOM), PepsiCo, Inc. (NASDAQ:PEP), Pfizer Inc. (NYSE:PFE), Comcast Corporation (NASDAQ:CMCSA), Toyota Motor Corporation (NYSE:TM), AbbVie Inc (NYSE:ABBV), and Oracle Corporation (NYSE:ORCL). This group of stocks' market valuations resemble KO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XOM,53,1114752,-12 PEP,53,3156792,-4 PFE,66,2139163,-1 CMCSA,80,7207135,-3 TM,13,719379,2 ABBV,89,6226917,8 ORCL,49,2312027,1 Average,57.6,3268024,-1.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 57.6 hedge funds with bullish positions and the average amount invested in these stocks was $3268 million. That figure was $20093 million in KO's case. AbbVie Inc (NYSE:ABBV) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 13 bullish hedge fund positions. The Coca-Cola Company (NYSE:KO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KO is 67.8. 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately KO wasn't nearly as popular as these 10 stocks and hedge funds that were betting on KO were disappointed as the stock returned 12.9% since the end of June (through 10/16) 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.

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