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Should I Buy Black Knight, Inc. (BKI)?

Debasis Saha

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Black Knight, Inc. (NYSE:BKI) and determine whether hedge funds skillfully traded this stock.

Is Black Knight, Inc. (NYSE:BKI) the right investment to pursue these days? The smart money was becoming more confident. The number of bullish hedge fund positions improved by 12 lately. Black Knight, Inc. (NYSE:BKI) was in 44 hedge funds' portfolios at the end of June. The all time high for this statistics is 45. Our calculations also showed that BKI 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Third Point
Third Point

Dan Loeb of Third Point

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we're going to take a look at the fresh hedge fund action regarding Black Knight, Inc. (NYSE:BKI).

Hedge fund activity in Black Knight, Inc. (NYSE:BKI)

At the end of the second quarter, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 38% from one quarter earlier. By comparison, 45 hedge funds held shares or bullish call options in BKI a year ago. With the smart money's capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Is BKI A Good Stock To Buy?
Is BKI A Good Stock To Buy?

More specifically, D E Shaw was the largest shareholder of Black Knight, Inc. (NYSE:BKI), with a stake worth $183.4 million reported as of the end of September. Trailing D E Shaw was Citadel Investment Group, which amassed a stake valued at $56.7 million. Echo Street Capital Management, Third Point, and Wallace R. Weitz & Co. were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Banbury Partners allocated the biggest weight to Black Knight, Inc. (NYSE:BKI), around 7.79% of its 13F portfolio. Aravt Global is also relatively very bullish on the stock, earmarking 6.55 percent of its 13F equity portfolio to BKI.

Consequently, some big names have been driving this bullishness. Citadel Investment Group, managed by Ken Griffin, established the largest position in Black Knight, Inc. (NYSE:BKI). Citadel Investment Group had $56.7 million invested in the company at the end of the quarter. Dan Loeb's Third Point also made a $32.3 million investment in the stock during the quarter. The following funds were also among the new BKI investors: Paul Marshall and Ian Wace's Marshall Wace LLP, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Brandon Haley's Holocene Advisors.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Black Knight, Inc. (NYSE:BKI) but similarly valued. These stocks are Halliburton Company (NYSE:HAL), Equity Lifestyle Properties, Inc. (NYSE:ELS), Principal Financial Group Inc (NYSE:PFG), Neurocrine Biosciences, Inc. (NASDAQ:NBIX), Waters Corporation (NYSE:WAT), Varian Medical Systems, Inc. (NYSE:VAR), and Ubiquiti Inc. (NYSE:UI). This group of stocks' market valuations resemble BKI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HAL,30,717639,-2 ELS,31,442219,0 PFG,31,188356,4 NBIX,38,1195826,0 WAT,38,615214,13 VAR,27,586063,2 UI,29,227931,6 Average,32,567607,3.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $568 million. That figure was $596 million in BKI's case. Neurocrine Biosciences, Inc. (NASDAQ:NBIX) is the most popular stock in this table. On the other hand Varian Medical Systems, Inc. (NYSE:VAR) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Black Knight, Inc. (NYSE:BKI) is more popular among hedge funds. Our overall hedge fund sentiment score for BKI is 89.3. 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. 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 33% in 2020 through the end of August and still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on BKI, though not to the same extent, as the stock returned 15.9% since the end of June and outperformed the market as well.

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Disclosure: None. This article was originally published at Insider Monkey.

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