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Did Hedge Funds Drop The Ball On Kraton Corporation (KRA) ?

Reymerlyn Martin

World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients' money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It's not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It's also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.

Is Kraton Corporation (NYSE:KRA) going to take off soon? Investors who are in the know are reducing their bets on the stock. The number of bullish hedge fund positions shrunk by 5 in recent months. Our calculations also showed that KRA isn't among the 30 most popular stocks among hedge funds. KRA was in 17 hedge funds' portfolios at the end of the fourth quarter of 2018. There were 22 hedge funds in our database with KRA positions at the end of the previous quarter.

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jay Petschek - Corsair Capital

We're going to analyze the fresh hedge fund action encompassing Kraton Corporation (NYSE:KRA).

How have hedgies been trading Kraton Corporation (NYSE:KRA)?

Heading into the first quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in KRA a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

KRA_may2019

Of the funds tracked by Insider Monkey, Jim Simons's Renaissance Technologies has the biggest position in Kraton Corporation (NYSE:KRA), worth close to $16.8 million, accounting for less than 0.1%% of its total 13F portfolio. The second largest stake is held by Royce & Associates, managed by Chuck Royce, which holds a $12.5 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining peers with similar optimism encompass Noam Gottesman's GLG Partners, Jay Petschek and Steven Major's Corsair Capital Management and Joel Greenblatt's Gotham Asset Management.

Judging by the fact that Kraton Corporation (NYSE:KRA) has experienced falling interest from the entirety of the hedge funds we track, it's easy to see that there is a sect of money managers that elected to cut their full holdings last quarter. At the top of the heap, David Rosen's Rubric Capital Management dumped the biggest position of the 700 funds tracked by Insider Monkey, valued at an estimated $12.4 million in stock. Peter Algert and Kevin Coldiron's fund, Algert Coldiron Investors, also dropped its stock, about $0.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 5 funds last quarter.

Let's also examine hedge fund activity in other stocks similar to Kraton Corporation (NYSE:KRA). These stocks are New Media Investment Group Inc (NYSE:NEWM), Infinera Corp. (NASDAQ:INFN), Armada Hoffler Properties Inc (NYSE:AHH), and ACCO Brands Corporation (NYSE:ACCO). This group of stocks' market valuations are closest to KRA's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NEWM,17,35940,-3 INFN,16,143455,-9 AHH,9,55295,1 ACCO,21,36332,0 Average,15.75,67756,-2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $68 million. That figure was $51 million in KRA's case. ACCO Brands Corporation (NYSE:ACCO) is the most popular stock in this table. On the other hand Armada Hoffler Properties Inc (NYSE:AHH) is the least popular one with only 9 bullish hedge fund positions. Kraton Corporation (NYSE:KRA) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on KRA as the stock returned 65.5% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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