Did Hedge Funds Make The Right Call On Kennametal Inc. (KMT) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Kennametal Inc. (NYSE:KMT) based on that data and determine whether they were really smart about the stock.

Kennametal Inc. (NYSE:KMT) was in 17 hedge funds’ portfolios at the end of March. KMT has experienced a decrease in hedge fund sentiment in recent months. There were 19 hedge funds in our database with KMT holdings at the end of the previous quarter. Our calculations also showed that KMT 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.

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. 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. Now let’s take a peek at the fresh hedge fund action regarding Kennametal Inc. (NYSE:KMT).

Hedge fund activity in Kennametal Inc. (NYSE:KMT)

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards KMT over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Ariel Investments held the most valuable stake in Kennametal Inc. (NYSE:KMT), which was worth $121.5 million at the end of the third quarter. On the second spot was GAMCO Investors which amassed $7.1 million worth of shares. Adage Capital Management, Millennium Management, 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 Ariel Investments allocated the biggest weight to Kennametal Inc. (NYSE:KMT), around 2.13% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, setting aside 0.23 percent of its 13F equity portfolio to KMT.

Judging by the fact that Kennametal Inc. (NYSE:KMT) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s safe to say that there is a sect of funds who were dropping their entire stakes heading into Q4. At the top of the heap, Steve Cohen’s Point72 Asset Management dumped the biggest position of all the hedgies tracked by Insider Monkey, comprising about $23.6 million in stock. Gregg Moskowitz’s fund, Interval Partners, also said goodbye to its stock, about $3.6 million worth. These moves are interesting, as aggregate hedge fund interest fell by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Kennametal Inc. (NYSE:KMT). We will take a look at Albany International Corp. (NYSE:AIN), FormFactor, Inc. (NASDAQ:FORM), Macy’s, Inc. (NYSE:M), and Aaron’s, Inc. (NYSE:AAN). This group of stocks’ market caps are similar to KMT’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $166 million. That figure was $148 million in KMT’s case. Macy’s, Inc. (NYSE:M) is the most popular stock in this table. On the other hand Albany International Corp. (NYSE:AIN) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Kennametal Inc. (NYSE:KMT) is even less popular than AIN. Hedge funds clearly dropped the ball on KMT as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on KMT as the stock returned 52.1% since the end of March and outperformed the market by an even larger margin.

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