Did Hedge Funds Make The Right Call On KB Home (KBH) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtKB Home (NYSE:KBH) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

KB Home (NYSE:KBH) investors should pay attention to a decrease in hedge fund sentiment in recent months. Our calculations also showed that KBH isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Brad Farber of Atika Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind we’re going to go over the recent hedge fund action encompassing KB Home (NYSE:KBH).

How are hedge funds trading KB Home (NYSE:KBH)?

At Q1’s end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the fourth quarter of 2019. On the other hand, there were a total of 21 hedge funds with a bullish position in KBH a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Among these funds, AQR Capital Management held the most valuable stake in KB Home (NYSE:KBH), which was worth $47.4 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $46.7 million worth of shares. Fisher Asset Management, Greenhaven Associates, and Capital Growth 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 Capital Growth Management allocated the biggest weight to KB Home (NYSE:KBH), around 2.92% of its 13F portfolio. Impala Asset Management is also relatively very bullish on the stock, designating 2.64 percent of its 13F equity portfolio to KBH.

Because KB Home (NYSE:KBH) has experienced bearish sentiment from the entirety of the hedge funds we track, logic holds that there were a few hedgies who were dropping their full holdings by the end of the first quarter. Intriguingly, Dmitry Balyasny’s Balyasny Asset Management dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, valued at an estimated $66.4 million in stock. Aaron Cowen’s fund, Suvretta Capital Management, also dropped its stock, about $17.4 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 4 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to KB Home (NYSE:KBH). These stocks are Applied Industrial Technologies Inc (NYSE:AIT), National Storage Affiliates Trust (NYSE:NSA), Fitbit Inc (NYSE:FIT), and Rogers Corporation (NYSE:ROG). This group of stocks’ market values are closest to KBH’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.25 hedge funds with bullish positions and the average amount invested in these stocks was $116 million. That figure was $291 million in KBH’s case. Fitbit Inc (NYSE:FIT) is the most popular stock in this table. On the other hand Applied Industrial Technologies Inc (NYSE:AIT) is the least popular one with only 14 bullish hedge fund positions. KB Home (NYSE:KBH) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on KBH as the stock returned 70.1% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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