Is Kratos Defense & Security Solutions, Inc (KTOS) A Good Stock To Buy?

Many investors, including Carl Icahn or Stan Druckenmiller, have been saying for a while now that the current market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the third quarter, many investors lost money due to unpredictable events such as the concerns over Valeant’s drug pricing policy that led to an overall drop among pharma stocks. Nevertheless, many of the stocks that tanked in the third quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) changed recently.

Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) was in 7 hedge funds’ portfolios at the end of September. KTOS shareholders have witnessed a decrease in activity from the world’s largest hedge funds recently. There were 9 hedge funds in our database with KTOS holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Papa Murphy’s Holdings Inc (NASDAQ:FRSH), Millennial Media, Inc. (NYSE:MM), and Organovo Holdings Inc (NYSEMKT:ONVO) to gather more data points.

According to most investors, hedge funds are seen as unimportant, outdated financial vehicles of yesteryear. While there are over 8000 funds in operation today, We look at the elite of this group, about 700 funds. These hedge fund managers shepherd most of all hedge funds’ total capital, and by watching their matchless investments, Insider Monkey has determined several investment strategies that have historically outpaced the broader indices. Insider Monkey’s small-cap hedge fund strategy exceeded the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

Keeping this in mind, let’s go over the key action encompassing Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).

What does the smart money think about Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS)?

At Q3’s end, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from one quarter earlier. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Chuck Royce’s Royce & Associates has the biggest position in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), worth close to $14.7 million, corresponding to 0.1% of its total 13F portfolio. The second most bullish fund manager is Huber Capital Management, led by Joe Huber, holding a $9.6 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Other peers with similar optimism contain Israel Englander’s Millennium Management, D. E. Shaw and Cliff Asness’s AQR Capital Management.

Since Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) has experienced a declination in interest from the smart money, it’s easy to see that there was a specific group of funds who were dropping their entire stakes by the end of the third quarter. Interestingly, Jim Simons’s Renaissance Technologies sold off the largest investment of the 700 funds followed by Insider Monkey, worth an estimated $1.7 million in stock, and Matthew Hulsizer’s PEAK6 Capital Management was right behind this move, as the fund dropped about $0.3 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by two funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) but similarly valued. These stocks are Papa Murphy’s Holdings Inc (NASDAQ:FRSH), Millennial Media, Inc. (NYSE:MM), Organovo Holdings Inc (NYSEMKT:ONVO), and Titan Machinery Inc. (NASDAQ:TITN). This group of stocks’ market caps are similar to KTOS’s market cap.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $17 million. That figure was $35 million in KTOS’s case. Titan Machinery Inc. (NASDAQ:TITN) is the most popular stock in this table. On the other hand Papa Murphy’s Holdings Inc (NASDAQ:FRSH) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks, Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) is even less popular than FRSH. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.