What Hedge Funds Think about South Korean ADRs

When most equity investors think of diversification, they think about investing their money in different stocks and sectors. While that approach does work to reduce the volatility in their portfolio and safeguards it from cyclical downturns faced by industries, it is not a foolproof method. That’s because regardless of the companies and sectors they are putting their money in, if all of them belong to the same geographical location, they are bound to get impacted by the economic situation of that region. To really diversify one’s portfolio, investors need to allocate some money to stocks from other geographies other than the one they live in. To make the process  of stock selection easier for such investors, we at Insider Monkey regularly come up with a list of stocks from different countries that are listed on the US exchanges based on their popularity among hedge funds. In this article, let’s take a closer look at five US-traded stocks of South Korean-based companies that hedge funds and other smart money investors are fond of the most.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5 KB Financial Group, Inc. (ADR) (NYSE:KB)

– Investors with long positions (as of March 31): 8

– Aggregate value of investors’ holdings (as of March 31): $24.01 million

Let’s start with KB Financial Group, Inc. (ADR) (NYSE:KB), whose ownership among funds covered by us remained unchanged, but the aggregate value of holdings came down by 10% during the first quarter. Notable investors that initiated a stake in the bank holding company during that period included Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, which purchased 73,717 shares. KB Financial Group, Inc. (ADR) (NYSE:KB)’s stock has appreciated by 14% so far this year, but in the last five years it has lost almost 35% of its value. It currently trades at a trailing price-to-earnings multiple of 8.34, below the industry average of 9.8.

#4 LG Display Co Ltd. (ADR) (NYSE:LPL)

– Investors with long positions (as of March 31): 10

– Aggregate value of investors’ holdings (as of March 31): $23.72 million

The stock of display panel manufacturer LG Display Co Ltd. (ADR) (NYSE:LPL) has surged by more than 30% since the beginning of the year. During the first quarter, the number of funds covered by us long LG Display Co Ltd. (ADR) (NYSE:LPL) inched down by one and the aggregate value of their holdings declined by 27%. Among them, funds that brought down their holding in the company during that period included John Overdeck and David Siegel‘s Two Sigma Advisors, which reduced its stake by 30% to 231,600 shares. For the second quarter, LG Display posted revenue of KRW 5,855 billion ($5.26 billion), down by 13% on the year, and turned to a net loss of KRW 84 billion ($7.53 million) from a profit of KRW 363 billion ($326.40 million) registered in the second quarter of 2015.

#3 KT Corp (ADR) (NYSE:KT)

– Investors with long positions (as of March 31): 12

– Aggregate value of investors’ holdings (as of March 31): $44.16 million

Moving on, the ownership of KT Corp (ADR) (NYSE:KT) among funds tracked by Insider Monkey rose by 50% and the total value of holdings jumped by 227% during the first quarter. Among them, David E. Shaw‘s D.E. Shaw increased its stake in the company by 635% to 525,720 shares. Shares of the telecommunication company were on a gradual decline in the period between 2013 and 2015. However, they have changed their trajectory this year and are currently trading up by 28% year-to-date. Citing the discount at which the company had been trading, when compared to telecommunications companies in other geographies and the turnaround it has managed, several analysts have upgraded the stock in the past few months and the stock currently has a consensus ‘Buy’ rating among analysts covering it.

#2 POSCO (ADR) (NYSE:PKX)

– Investors with long positions (as of March 31): 13

– Aggregate value of investors’ holdings (as of March 31): $56.1 million

Amid a 33.85% rise in its stock during the first quarter, South Korea’s steel producer POSCO (ADR) (NYSE:PKX) saw a major jump in its ownership with the number of investors from our database that held shares of the company having jumped by five. However, the aggregate value of holdings in the company declined by 28%, mainly due to Martin Whitman‘s Third Avenue Management, which had been the second largest shareholder of POSCO (ADR) (NYSE:PKX) at the end of 2015 and sold the stake during the first three months of 2016. In the last few years, the company has made a major foray into lithium production, particularly in South America, which has been appreciated by both analysts and investors. It is currently working with Western Lithium to construct a new lithium plant in Argentina, which is expected to begin commercial production within a year.

#1 SK Telecom Co Ltd (ADR) (NYSE:SKM)

– Investors with long positions (as of March 31): 13

– Aggregate value of investors’ holdings (as of March 31): $105.85 million

With its ownership among funds covered by us increasing by five and the aggregate value of their holdings in it swelling by 61% during the first quarter, SK Telecom Co Ltd (ADR) (NYSE:SKM) emerged as the post popular South Korean stock among funds covered by us at the end of March. It was another stock in which Arrowstreet Capital initiated a stake during the first quarter, purchasing 773,054 shares and becoming its largest shareholder among the investors covered by us. Shares of SK Telecom Co Ltd (ADR) (NYSE:SKM) have advanced by over 13% since the beginning of the year and are currently trading at over 13 times forward earnings. In November last year, the company announced that it had signed a deal to acquire South Korea’s largest cable and Internet operator, CJ HelloVision, which would make it the second largest cable broadcaster in the country after KT Corp. However, this deal has come under intense scrutiny from regulators after competitors alleged that it would allow SK Telecom Co Ltd to unfairly dominate the industry. In its financial results for the second quarter, SK Telecom posted revenue of KRW 4,267 billion ($3.84 billion), almost flat on the year, while net income of KRW 291 billion ($261.66 million) slid by an annual 27%.

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