Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards KB Home (NYSE:KBH).
KB Home (NYSE:KBH) shareholders have witnessed an increase in enthusiasm from smart money of late. KBH was in 29 hedge funds’ portfolios at the end of December. There were 26 hedge funds in our database with KBH holdings at the end of the previous quarter. Our calculations also showed that KBH 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.
Brad Farber of Atika Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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 check out the fresh hedge fund action surrounding KB Home (NYSE:KBH).
What have hedge funds been doing with KB Home (NYSE:KBH)?
Heading into the first quarter of 2020, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the third quarter of 2019. On the other hand, there were a total of 14 hedge funds with a bullish position in KBH a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Ken Fisher’s Fisher Asset Management has the biggest position in KB Home (NYSE:KBH), worth close to $86.4 million, corresponding to 0.1% of its total 13F portfolio. Coming in second is Citadel Investment Group, led by Ken Griffin, holding a $80.5 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions encompass Renaissance Technologies, Dmitry Balyasny’s Balyasny Asset Management and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to KB Home (NYSE:KBH), around 1.74% of its 13F portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, dishing out 1.34 percent of its 13F equity portfolio to KBH.
Now, some big names have been driving this bullishness. Winton Capital Management, managed by David Harding, established the largest position in KB Home (NYSE:KBH). Winton Capital Management had $8.2 million invested in the company at the end of the quarter. Brad Farber’s Atika Capital also initiated a $6.2 million position during the quarter. The other funds with brand new KBH positions are Ray Dalio’s Bridgewater Associates, Ran Pang’s Quantamental Technologies, and Hoon Kim’s Quantinno Capital.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as KB Home (NYSE:KBH) but similarly valued. These stocks are RLJ Lodging Trust (NYSE:RLJ), Navient Corp (NASDAQ:NAVI), CVB Financial Corp. (NASDAQ:CVBF), and Cantel Medical Corp. (NYSE:CMD). This group of stocks’ market caps are closest to KBH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| RLJ | 17 | 131994 | -4 |
| NAVI | 38 | 513271 | 5 |
| CVBF | 14 | 47079 | 0 |
| CMD | 11 | 103149 | -2 |
| Average | 20 | 198873 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $199 million. That figure was $535 million in KBH’s case. Navient Corp (NASDAQ:NAVI) is the most popular stock in this table. On the other hand Cantel Medical Corp. (NYSE:CMD) is the least popular one with only 11 bullish hedge fund positions. KB Home (NYSE:KBH) is not the most popular stock in this group but hedge fund interest is still above average. 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 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately KBH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KBH were disappointed as the stock returned -43% 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 many of these stocks already outperformed the market so far this year.
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.
