Were Hedge Funds Right About KLA Corporation (KLAC)?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to KLA Corporation (NASDAQ:KLAC) changed recently.

KLA Corporation (NASDAQ:KLAC) has experienced an increase in activity from the world’s largest hedge funds lately. KLA Corporation (NASDAQ:KLAC) was in 37 hedge funds’ portfolios at the end of June. The all time high for this statistics is 46. Our calculations also showed that KLAC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Matthew Hulsizer of PEAK6 Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to view the latest hedge fund action regarding KLA Corporation (NASDAQ:KLAC).

What have hedge funds been doing with KLA Corporation (NASDAQ:KLAC)?

At Q2’s end, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of 42% from the first quarter of 2020. By comparison, 24 hedge funds held shares or bullish call options in KLAC a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Panayotis Takis Sparaggis’s Alkeon Capital Management has the largest position in KLA Corporation (NASDAQ:KLAC), worth close to $351.6 million, amounting to 0.9% of its total 13F portfolio. Coming in second is Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke and John Campbell, holding a $89.1 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism comprise Cliff Asness’s AQR Capital Management, Michael Rockefeller and KarláKroeker’s Woodline Partners and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Blue Grotto Capital allocated the biggest weight to KLA Corporation (NASDAQ:KLAC), around 3.07% of its 13F portfolio. Breakline Capital is also relatively very bullish on the stock, designating 2.19 percent of its 13F equity portfolio to KLAC.

With a general bullishness amongst the heavyweights, specific money managers have been driving this bullishness. Woodline Partners, managed by Michael Rockefeller and KarláKroeker, initiated the largest position in KLA Corporation (NASDAQ:KLAC). Woodline Partners had $50.2 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners also made a $7.9 million investment in the stock during the quarter. The following funds were also among the new KLAC investors: Kevin McCarthy’s Breakline Capital, Matthew Hulsizer’s PEAK6 Capital Management, and Mario Gabelli’s GAMCO Investors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as KLA Corporation (NASDAQ:KLAC) but similarly valued. We will take a look at ICICI Bank Limited (NYSE:IBN), IHS Markit Ltd. (NYSE:INFO), Canadian Imperial Bank of Commerce (NYSE:CM), EOG Resources Inc (NYSE:EOG), Royalty Pharma plc (NASDAQ:RPRX), Seagen Inc. (NASDAQ:SGEN), and Synopsys, Inc. (NASDAQ:SNPS). This group of stocks’ market caps are closest to KLAC’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $2100 million. That figure was $662 million in KLAC’s case. EOG Resources Inc (NYSE:EOG) is the most popular stock in this table. On the other hand Canadian Imperial Bank of Commerce (NYSE:CM) is the least popular one with only 6 bullish hedge fund positions. KLA Corporation (NASDAQ:KLAC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KLAC is 73.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately KLAC wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KLAC were disappointed as the stock returned 1.8% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 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.