Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).
Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) has seen an increase in hedge fund interest in recent months. Our calculations also showed that KTOS isn’t among the 30 most popular stocks among hedge funds (view the video below).
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’ 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s review the fresh hedge fund action surrounding Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).
What have hedge funds been doing with Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS)?
At the end of the second quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the first quarter of 2019. On the other hand, there were a total of 12 hedge funds with a bullish position in KTOS 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.
Among these funds, Impala Asset Management held the most valuable stake in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), which was worth $28.2 million at the end of the second quarter. On the second spot was D E Shaw which amassed $15.7 million worth of shares. Moreover, Driehaus Capital, Royce & Associates, and Balyasny Asset Management were also bullish on Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), allocating a large percentage of their portfolios to this stock.
As industrywide interest jumped, key hedge funds were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, established the most outsized call position in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). Balyasny Asset Management had $8.9 million invested in the company at the end of the quarter. Andrew Sandler’s Sandler Capital Management also initiated a $7 million position during the quarter. The other funds with new positions in the stock are Andrew Sandler’s Sandler Capital Management, Principal Global Investors’s Columbus Circle Investors, and Noam Gottesman’s GLG Partners.
Let’s go over hedge fund activity in other stocks similar to Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). We will take a look at Argo Group International Holdings, Ltd. (NYSE:ARGO), QTS Realty Trust Inc (NYSE:QTS), iRobot Corporation (NASDAQ:IRBT), and Apollo Commercial Real Estate Finance, Inc. (NYSE:ARI). This group of stocks’ market valuations are similar to KTOS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ARGO | 19 | 218517 | 2 |
| QTS | 23 | 357128 | 1 |
| IRBT | 9 | 57604 | -6 |
| ARI | 13 | 68424 | 2 |
| Average | 16 | 175418 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $175 million. That figure was $101 million in KTOS’s case. QTS Realty Trust Inc (NYSE:QTS) is the most popular stock in this table. On the other hand iRobot Corporation (NASDAQ:IRBT) is the least popular one with only 9 bullish hedge fund positions. Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately KTOS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KTOS were disappointed as the stock returned -18.7% during the third quarter 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.
Disclosure: None. This article was originally published at Insider Monkey.
