Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Kennametal Inc. (NYSE:KMT).
Kennametal Inc. (NYSE:KMT) investors should be aware of an increase in support from the world’s most elite money managers in recent months. KMT was in 25 hedge funds’ portfolios at the end of the third quarter of 2019. There were 20 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 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Phill Gross of Adage Capital Management
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to view the new hedge fund action encompassing Kennametal Inc. (NYSE:KMT).
Hedge fund activity in Kennametal Inc. (NYSE:KMT)
At Q3’s end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards KMT over the last 17 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Ariel Investments was the largest shareholder of Kennametal Inc. (NYSE:KMT), with a stake worth $171.4 million reported as of the end of September. Trailing Ariel Investments was AQR Capital Management, which amassed a stake valued at $26.6 million. Adage Capital Management, GAMCO Investors, 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 Ariel Investments allocated the biggest weight to Kennametal Inc. (NYSE:KMT), around 2.28% of its portfolio. Cerebellum Capital is also relatively very bullish on the stock, earmarking 0.28 percent of its 13F equity portfolio to KMT.
Consequently, key money managers were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, initiated the largest position in Kennametal Inc. (NYSE:KMT). Balyasny Asset Management had $7.9 million invested in the company at the end of the quarter. Noam Gottesman’s GLG Partners also initiated a $6.4 million position during the quarter. The other funds with new positions in the stock are Matthew Hulsizer’s PEAK6 Capital Management, and Michael Gelband’s ExodusPoint Capital.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Kennametal Inc. (NYSE:KMT) but similarly valued. These stocks are Nelnet, Inc. (NYSE:NNI), WD-40 Company (NASDAQ:WDFC), Trinity Industries, Inc. (NYSE:TRN), and BridgeBio Pharma, Inc. (NASDAQ:BBIO). This group of stocks’ market caps are closest to KMT’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NNI | 11 | 86338 | -2 |
| WDFC | 17 | 209160 | 2 |
| TRN | 26 | 680181 | 3 |
| BBIO | 12 | 884584 | -2 |
| Average | 16.5 | 465066 | 0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $465 million. That figure was $289 million in KMT’s case. Trinity Industries, Inc. (NYSE:TRN) is the most popular stock in this table. On the other hand Nelnet, Inc. (NYSE:NNI) is the least popular one with only 11 bullish hedge fund positions. Kennametal Inc. (NYSE:KMT) 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 KMT as the stock returned 14% 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.
