RBC Bearings Incorporated (ROLL), Proto Labs Inc (PRLB): Hedge Funds Are Dumping Kennametal Inc. (KMT)

Is Kennametal Inc. (NYSE:KMT) going to take off soon? Hedge funds are getting less optimistic. The number of bullish hedge fund positions were trimmed by 7 recently.

If you’d ask most market participants, hedge funds are seen as slow, old financial vehicles of yesteryear. While there are over 8000 funds with their doors open today, we hone in on the crème de la crème of this club, about 450 funds. It is estimated that this group oversees the majority of all hedge funds’ total asset base, and by tracking their highest performing investments, we have deciphered a number of investment strategies that have historically beaten the broader indices. Our small-cap hedge fund strategy beat the S&P 500 index by 18 percentage points a year for a decade in our back tests, and since we’ve began to sharing our picks with our subscribers at the end of August 2012, we have trumped the S&P 500 index by 24 percentage points in 7 months (explore the details and some picks here).

Just as beneficial, positive insider trading sentiment is a second way to parse down the investments you’re interested in. There are a variety of stimuli for a bullish insider to downsize shares of his or her company, but only one, very simple reason why they would buy. Many academic studies have demonstrated the impressive potential of this strategy if investors know what to do (learn more here).

Now, it’s important to take a glance at the latest action encompassing Kennametal Inc. (NYSE:KMT).

How have hedgies been trading Kennametal Inc. (NYSE:KMT)?

Heading into 2013, a total of 13 of the hedge funds we track held long positions in this stock, a change of -35% from the previous quarter. With hedge funds’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were increasing their stakes meaningfully.

Of the funds we track, Royce & Associates, managed by Chuck Royce, holds the largest position in Kennametal Inc. (NYSE:KMT). Royce & Associates has a $300.6 million position in the stock, comprising 1% of its 13F portfolio. Coming in second is Alexander Roepers of Atlantic Investment Management, with a $156 million position; the fund has 12.8% of its 13F portfolio invested in the stock. Some other peers with similar optimism include Martin Whitman’s Third Avenue Management, Ric Dillon’s Diamond Hill Capital and Jim Simons’s Renaissance Technologies.

Since Kennametal Inc. (NYSE:KMT) has witnessed falling interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of money managers that elected to cut their positions entirely heading into 2013. Intriguingly, John Murphy’s Alydar Capital said goodbye to the biggest investment of the “upper crust” of funds we track, valued at about $11.1 million in call options. Steven Cohen’s fund, SAC Capital Advisors, also dropped its stock, about $4.7 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 7 funds heading into 2013.

How have insiders been trading Kennametal Inc. (NYSE:KMT)?

Insider purchases made by high-level executives is best served when the company we’re looking at has experienced transactions within the past six months. Over the latest 180-day time period, Kennametal Inc. (NYSE:KMT) has seen zero unique insiders purchasing, and 8 insider sales (see the details of insider trades here).

Let’s also examine hedge fund and insider activity in other stocks similar to Kennametal Inc. (NYSE:KMT). These stocks are Kaydon Corporation (NYSE:KDN), RBC Bearings Incorporated (NASDAQ:ROLL), Proto Labs Inc (NYSE:PRLB), The Timken Company (NYSE:TKR), and MRC Global Inc (NYSE:MRC). This group of stocks are the members of the machine tools & accessories industry and their market caps are similar to KMT’s market cap.

With the returns demonstrated by the aforementioned studies, retail investors must always monitor hedge fund and insider trading sentiment, and Kennametal Inc. (NYSE:KMT) shareholders fit into this picture quite nicely.

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