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. Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 835 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about KEMET Corporation (NYSE:KEM).
KEMET Corporation (NYSE:KEM) shareholders have witnessed an increase in hedge fund interest recently. Our calculations also showed that KEM 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 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 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 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.
David Harding of Winton Capital Management
We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. 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. Keeping this in mind let’s go over the new hedge fund action encompassing KEMET Corporation (NYSE:KEM).
How have hedgies been trading KEMET Corporation (NYSE:KEM)?
At the end of the fourth quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KEM over the last 18 quarters. With the smart money’s capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
More specifically, Magnetar Capital was the largest shareholder of KEMET Corporation (NYSE:KEM), with a stake worth $77.8 million reported as of the end of September. Trailing Magnetar Capital was Renaissance Technologies, which amassed a stake valued at $23 million. Royce & Associates, Divisar Capital, and Millennium 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 Divisar Capital allocated the biggest weight to KEMET Corporation (NYSE:KEM), around 5.75% of its 13F portfolio. Nokomis Capital is also relatively very bullish on the stock, earmarking 2.26 percent of its 13F equity portfolio to KEM.
As aggregate interest increased, key hedge funds were leading the bulls’ herd. Magnetar Capital, managed by Alec Litowitz and Ross Laser, established the largest position in KEMET Corporation (NYSE:KEM). Magnetar Capital had $77.8 million invested in the company at the end of the quarter. John Orrico’s Water Island Capital also initiated a $9.4 million position during the quarter. The following funds were also among the new KEM investors: Karim Abbadi and Edward McBride’s Centiva Capital, David Harding’s Winton Capital Management, and Nancy Havens-Hasty’s Havens Advisors.
Let’s go over hedge fund activity in other stocks similar to KEMET Corporation (NYSE:KEM). We will take a look at Brinker International, Inc. (NYSE:EAT), Huron Consulting Group (NASDAQ:HURN), BioTelemetry, Inc. (NASDAQ:BEAT), and Seacoast Banking Corporation of Florida (NASDAQ:SBCF). This group of stocks’ market caps are closest to KEM’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EAT | 21 | 181122 | -8 |
| HURN | 14 | 48321 | 3 |
| BEAT | 15 | 49876 | -3 |
| SBCF | 8 | 50927 | 2 |
| Average | 14.5 | 82562 | -1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $83 million. That figure was $192 million in KEM’s case. Brinker International, Inc. (NYSE:EAT) is the most popular stock in this table. On the other hand Seacoast Banking Corporation of Florida (NASDAQ:SBCF) is the least popular one with only 8 bullish hedge fund positions. KEMET Corporation (NYSE:KEM) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds 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 still beat the market by 4.2 percentage points. Hedge funds were also right about betting on KEM as the stock returned -7.9% in 2020 (through April 6th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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.
