At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Kraton Corporation (NYSE:KRA) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Kraton Corporation (NYSE:KRA) an outstanding investment right now? The best stock pickers were taking a bullish view. The number of long hedge fund bets increased by 4 recently. Kraton Corporation (NYSE:KRA) was in 18 hedge funds’ portfolios at the end of June. The all time high for this statistics is 28. Our calculations also showed that KRA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 14 hedge funds in our database with KRA holdings at the end of March.
Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Tom Sandell of Sandell Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s view the latest hedge fund action encompassing Kraton Corporation (NYSE:KRA).
What does smart money think about Kraton Corporation (NYSE:KRA)?
At the end of June, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from the previous quarter. By comparison, 17 hedge funds held shares or bullish call options in KRA a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Kraton Corporation (NYSE:KRA) was held by Royce & Associates, which reported holding $11.2 million worth of stock at the end of September. It was followed by Millennium Management with a $7.6 million position. Other investors bullish on the company included Arrowstreet Capital, Sandell Asset Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Sandell Asset Management allocated the biggest weight to Kraton Corporation (NYSE:KRA), around 1.82% of its 13F portfolio. Nishkama Capital is also relatively very bullish on the stock, setting aside 1.61 percent of its 13F equity portfolio to KRA.
Consequently, some big names have been driving this bullishness. Nishkama Capital, managed by Ravee Mehta, established the biggest position in Kraton Corporation (NYSE:KRA). Nishkama Capital had $3.8 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also made a $1.5 million investment in the stock during the quarter. The other funds with brand new KRA positions are Joel Greenblatt’s Gotham Asset Management, Donald Sussman’s Paloma Partners, and Steve Cohen’s Point72 Asset Management.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Kraton Corporation (NYSE:KRA) but similarly valued. We will take a look at China Online Education Group (NYSE:COE), Tivity Health, Inc. (NASDAQ:TVTY), Blucora Inc (NASDAQ:BCOR), PAR Technology Corporation (NYSE:PAR), Franklin Street Properties Corp. (NYSE:FSP), The Children’s Place Inc. (NASDAQ:PLCE), and Globalstar, Inc. (NYSE:GSAT). This group of stocks’ market valuations match KRA’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| COE | 5 | 29048 | 1 |
| TVTY | 16 | 201351 | 3 |
| BCOR | 20 | 75476 | 1 |
| PAR | 10 | 214177 | 2 |
| FSP | 13 | 28430 | 8 |
| PLCE | 23 | 138666 | 5 |
| GSAT | 9 | 56377 | -3 |
| Average | 13.7 | 106218 | 2.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.7 hedge funds with bullish positions and the average amount invested in these stocks was $106 million. That figure was $46 million in KRA’s case. The Children’s Place Inc. (NASDAQ:PLCE) is the most popular stock in this table. On the other hand China Online Education Group (NYSE:COE) is the least popular one with only 5 bullish hedge fund positions. Kraton Corporation (NYSE:KRA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KRA is 64.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 24.8% in 2020 through the end of September and beat the market by 19.3 percentage points. Unfortunately KRA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KRA were disappointed as the stock returned 3.1% in Q3 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Follow Kraton Corp (NYSE:KRA)
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Disclosure: None. This article was originally published at Insider Monkey.
