We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
KLA Corporation (NASDAQ:KLAC) investors should be aware of an increase in hedge fund sentiment recently. Our calculations also showed that KLAC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Ken Griffin of Citadel Investment Group
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to check out the key hedge fund action encompassing KLA Corporation (NASDAQ:KLAC).
How have hedgies been trading KLA Corporation (NASDAQ:KLAC)?
At Q3’s end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. On the other hand, there were a total of 27 hedge funds with a bullish position in KLAC a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
More specifically, Arrowstreet Capital was the largest shareholder of KLA Corporation (NASDAQ:KLAC), with a stake worth $151.6 million reported as of the end of September. Trailing Arrowstreet Capital was Alkeon Capital Management, which amassed a stake valued at $143.2 million. Holocene Advisors, Theleme Partners, and Citadel Investment Group 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 Theleme Partners allocated the biggest weight to KLA Corporation (NASDAQ:KLAC), around 4.45% of its 13F portfolio. Mondrian Capital is also relatively very bullish on the stock, dishing out 1.93 percent of its 13F equity portfolio to KLAC.
As aggregate interest increased, some big names were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most valuable position in KLA Corporation (NASDAQ:KLAC). Arrowstreet Capital had $151.6 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $13.8 million position during the quarter. The following funds were also among the new KLAC investors: David E. Shaw’s D E Shaw, Andrew Sandler’s Sandler Capital Management, and Ernest Chow and Jonathan Howe’s Sensato Capital Management.
Let’s also examine hedge fund activity in other stocks similar to KLA Corporation (NASDAQ:KLAC). These stocks are McKesson Corporation (NYSE:MCK), Sprint Corporation (NYSE:S), Lululemon Athletica inc. (NASDAQ:LULU), and Willis Towers Watson Public Limited Company (NASDAQ:WLTW). This group of stocks’ market caps resemble KLAC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MCK | 39 | 1982389 | 3 |
| S | 23 | 885703 | -2 |
| LULU | 46 | 1527406 | -3 |
| WLTW | 35 | 1905841 | 2 |
| Average | 35.75 | 1575335 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 35.75 hedge funds with bullish positions and the average amount invested in these stocks was $1575 million. That figure was $784 million in KLAC’s case. Lululemon Athletica inc. (NASDAQ:LULU) is the most popular stock in this table. On the other hand Sprint Corporation (NYSE:S) is the least popular one with only 23 bullish hedge fund positions. KLA Corporation (NASDAQ:KLAC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on KLAC as the stock returned 102.8% in 2019 through December 23rd and outperformed the market by an even larger margin.
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.
