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Hedge Fund Darlings vs. KKR & Co Inc. (KKR) In 2019

Debasis Saha

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about KKR & Co Inc. (NYSE:KKR)?

Is KKR & Co Inc. (NYSE:KKR) undervalued? Prominent investors are in an optimistic mood. The number of long hedge fund bets went up by 5 in recent months. Our calculations also showed that KKR isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_30493" align="alignnone" width="600"] Jeffrey Ubben of ValueAct Capital[/caption]

Jeff Ubben VALUEACT CAPITAL

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind let's go over the key hedge fund action surrounding KKR & Co Inc. (NYSE:KKR).

How are hedge funds trading KKR & Co Inc. (NYSE:KKR)?

At Q3's end, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KKR over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is KKR A Good Stock To Buy?

Among these funds, ValueAct Capital held the most valuable stake in KKR & Co Inc. (NYSE:KKR), which was worth $1291.5 million at the end of the third quarter. On the second spot was Akre Capital Management which amassed $342.5 million worth of shares. Diamond Hill Capital, Pzena Investment Management, and Citadel Investment Group 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 Hudson Way Capital Management allocated the biggest weight to KKR & Co Inc. (NYSE:KKR), around 14.19% of its 13F portfolio. ValueAct Capital is also relatively very bullish on the stock, setting aside 13.93 percent of its 13F equity portfolio to KKR.

As industrywide interest jumped, specific money managers were leading the bulls' herd. Citadel Investment Group, managed by Ken Griffin, initiated the most outsized position in KKR & Co Inc. (NYSE:KKR). Citadel Investment Group had $200.1 million invested in the company at the end of the quarter. James Parsons's Junto Capital Management also initiated a $74.8 million position during the quarter. The other funds with brand new KKR positions are Peter Seuss's Prana Capital Management, George Soros's Soros Fund Management, and Matthew Hulsizer's PEAK6 Capital Management.

Let's go over hedge fund activity in other stocks similar to KKR & Co Inc. (NYSE:KKR). These stocks are Synchrony Financial (NYSE:SYF), Veeva Systems Inc (NYSE:VEEV), American Water Works Company, Inc. (NYSE:AWK), and Aptiv PLC (NYSE:APTV). This group of stocks' market caps are closest to KKR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SYF,43,2375436,-3 VEEV,33,1020379,-2 AWK,35,652077,12 APTV,27,887545,1 Average,34.5,1233859,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.5 hedge funds with bullish positions and the average amount invested in these stocks was $1234 million. That figure was $3227 million in KKR's case. Synchrony Financial (NYSE:SYF) is the most popular stock in this table. On the other hand Aptiv PLC (NYSE:APTV) is the least popular one with only 27 bullish hedge fund positions. KKR & Co Inc. (NYSE:KKR) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on KKR as the stock returned 50.9% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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