Should You Buy Kennametal Inc. (KMT)?

The elite funds run by legendary investors such as Dan Loeb and David Tepper make hundreds of millions of dollars for themselves and their investors by spending enormous resources doing research on small cap stocks that big investment banks don’t follow. Because of their pay structures, they have strong incentive to do the research necessary to beat the market. That’s why we pay close attention to what they think in small cap stocks. In this article, we take a closer look at Kennametal Inc. (NYSE:KMT) from the perspective of those elite funds.

Kennametal Inc. (NYSE:KMT) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 21 hedge funds’ portfolios at the end of the third quarter of 2015. 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 Kite Realty Group Trust (NYSE:KRG), Ellie Mae Inc (NYSE:ELLI), and Kythera Biopharmaceuticals Inc (NASDAQ:KYTH) to gather more data points.

At the moment there are tons of methods shareholders employ to value stocks. Two of the most under-the-radar methods are hedge fund and insider trading activity. Our researchers have shown that, historically, those who follow the top picks of the best fund managers can trounce the market by a very impressive amount (see the details here).

Keeping this in mind, let’s analyze the recent action regarding Kennametal Inc. (NYSE:KMT).

What have hedge funds been doing with Kennametal Inc. (NYSE:KMT)?

Heading into Q4, a total of 21 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Carlson Capital, managed by Clint Carlson, holds the number one position in Kennametal Inc. (NYSE:KMT). Carlson Capital has an $80.9 million position in the stock, comprising 0.9% of its 13F portfolio. The second largest stake is held by Chuck Royce of Royce & Associates, with an $71.8 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish include Joel Greenblatt’s Gotham Asset Management, Joshua Friedman and Mitchell Julis’s Canyon Capital Advisors and Michael Pollack’s Destrier Capital.

Since Kennametal Inc. (NYSE:KMT) has faced declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of fund managers who sold off their positions entirely last quarter. At the top of the heap, Peter Muller’s PDT Partners said goodbye to the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $2.5 million in stock. Chao Ku’s fund, Nine Chapters Capital Management, also dumped its stock, about $1.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Kennametal Inc. (NYSE:KMT) but similarly valued. We will take a look at Kite Realty Group Trust (NYSE:KRG), Ellie Mae Inc (NYSE:ELLI), Kythera Biopharmaceuticals Inc (NASDAQ:KYTH), and Masimo Corporation (NASDAQ:MASI). All of these stocks’ market caps match KMT’s market cap.

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 $220 million. That figure was $531 million in KMT’s case. Ellie Mae Inc (NYSE:ELLI) is the most popular stock in this table. On the other hand, Kite Realty Group Trust (NYSE:KRG) is the least popular one with only 7 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. This is a slightly positive signal, but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard ELLI might be a better candidate to consider a long position.