The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May and August as this time China pivoted and Trump put more pressure on China by increasing tariffs. Fourth quarter brought optimism to the markets and hedge funds’ top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 37.4% through the end of November, vs. a gain of 27.5% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Kadant Inc. (NYSE:KAI), and what that likely means for the prospects of the company and its stock.
Kadant Inc. (NYSE:KAI) investors should be aware of an increase in support from the world’s most elite money managers of late. KAI was in 12 hedge funds’ portfolios at the end of the third quarter of 2019. There were 11 hedge funds in our database with KAI holdings at the end of the previous quarter. Our calculations also showed that KAI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s review the key hedge fund action regarding Kadant Inc. (NYSE:KAI).
Hedge fund activity in Kadant Inc. (NYSE:KAI)
At Q3’s end, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from the second quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in KAI a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Kadant Inc. (NYSE:KAI) was held by Royce & Associates, which reported holding $55.2 million worth of stock at the end of September. It was followed by Millennium Management with a $6 million position. Other investors bullish on the company included Renaissance Technologies, Winton Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Kadant Inc. (NYSE:KAI), around 0.51% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, setting aside 0.03 percent of its 13F equity portfolio to KAI.
As one would reasonably expect, key hedge funds have been driving this bullishness. Millennium Management, managed by Israel Englander, created the most outsized position in Kadant Inc. (NYSE:KAI). Millennium Management had $6 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $0.5 million position during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace’s Marshall Wace and Donald Sussman’s Paloma Partners.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Kadant Inc. (NYSE:KAI) but similarly valued. We will take a look at ARMOUR Residential REIT, Inc. (NYSE:ARR), AtriCure Inc. (NASDAQ:ATRC), Fitbit Inc (NYSE:FIT), and Sapiens International Corporation N.V. (NASDAQ:SPNS). This group of stocks’ market values are closest to KAI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ARR | 11 | 69052 | 3 |
| ATRC | 19 | 87624 | -1 |
| FIT | 9 | 69023 | -4 |
| SPNS | 8 | 28907 | 0 |
| Average | 11.75 | 63652 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $64 million. That figure was $72 million in KAI’s case. AtriCure Inc. (NASDAQ:ATRC) is the most popular stock in this table. On the other hand Sapiens International Corporation N.V. (NASDAQ:SPNS) is the least popular one with only 8 bullish hedge fund positions. Kadant Inc. (NYSE:KAI) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on KAI as the stock returned 11.2% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
