We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) was in 16 hedge funds’ portfolios at the end of December. KTOS investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months. There were 22 hedge funds in our database with KTOS positions at the end of the previous quarter. Our calculations also showed that KTOS isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Andrew Sandler of Sandler Capital Management
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a gander at the recent hedge fund action surrounding Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).
What have hedge funds been doing with Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS)?
At Q4’s end, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -27% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards KTOS over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, D E Shaw was the largest shareholder of Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), with a stake worth $10.4 million reported as of the end of September. Trailing D E Shaw was Waratah Capital Advisors, which amassed a stake valued at $6 million. Sandler Capital Management, Royce & Associates, and Osterweis Capital 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 Sandler Capital Management allocated the biggest weight to Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), around 0.66% of its 13F portfolio. Waratah Capital Advisors is also relatively very bullish on the stock, dishing out 0.63 percent of its 13F equity portfolio to KTOS.
Due to the fact that Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) has faced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedgies that elected to cut their full holdings last quarter. At the top of the heap, Principal Global Investors’s Columbus Circle Investors cut the largest stake of all the hedgies tracked by Insider Monkey, comprising an estimated $17.2 million in stock, and Richard Driehaus’s Driehaus Capital was right behind this move, as the fund sold off about $11 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 6 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). These stocks are Magellan Health Inc (NASDAQ:MGLN), Atkore International Group Inc. (NYSE:ATKR), Taubman Centers, Inc. (NYSE:TCO), and Hostess Brands, Inc. (NASDAQ:TWNK). This group of stocks’ market values resemble KTOS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MGLN | 19 | 381495 | 1 |
| ATKR | 23 | 183994 | 2 |
| TCO | 26 | 128381 | 2 |
| TWNK | 37 | 288944 | 4 |
| Average | 26.25 | 245704 | 2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $246 million. That figure was $40 million in KTOS’s case. Hostess Brands, Inc. (NASDAQ:TWNK) is the most popular stock in this table. On the other hand Magellan Health Inc (NASDAQ:MGLN) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) is even less popular than MGLN. Hedge funds dodged a bullet by taking a bearish stance towards KTOS. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately KTOS wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); KTOS investors were disappointed as the stock returned -21.5% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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.
