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We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by 14.5 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Kennametal Inc. (NYSE:KMT) has seen an increase in hedge fund interest of late. Our calculations also showed that KMT 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).
Why do we pay any attention at all to hedge fund sentiment? 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.
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Cliff Asness of AQR Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Now let's view the latest hedge fund action regarding Kennametal Inc. (NYSE:KMT).
How have hedgies been trading Kennametal Inc. (NYSE:KMT)?
Heading into the fourth quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KMT over the last 17 quarters. With the smart money's capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
More specifically, Ariel Investments was the largest shareholder of Kennametal Inc. (NYSE:KMT), with a stake worth $171.4 million reported as of the end of September. Trailing Ariel Investments was AQR Capital Management, which amassed a stake valued at $26.6 million. Adage Capital Management, GAMCO Investors, and Millennium Management 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 Ariel Investments allocated the biggest weight to Kennametal Inc. (NYSE:KMT), around 2.28% of its 13F portfolio. Cerebellum Capital is also relatively very bullish on the stock, setting aside 0.28 percent of its 13F equity portfolio to KMT.
Now, key hedge funds were leading the bulls' herd. Balyasny Asset Management, managed by Dmitry Balyasny, established the biggest position in Kennametal Inc. (NYSE:KMT). Balyasny Asset Management had $7.9 million invested in the company at the end of the quarter. Noam Gottesman's GLG Partners also made a $6.4 million investment in the stock during the quarter. The other funds with brand new KMT positions are Matthew Hulsizer's PEAK6 Capital Management, Matthew Hulsizer's PEAK6 Capital Management, and Michael Gelband's ExodusPoint Capital.
Let's now review hedge fund activity in other stocks similar to Kennametal Inc. (NYSE:KMT). We will take a look at Nelnet, Inc. (NYSE:NNI), WD-40 Company (NASDAQ:WDFC), Trinity Industries, Inc. (NYSE:TRN), and BridgeBio Pharma, Inc. (NASDAQ:BBIO). This group of stocks' market valuations are similar to KMT's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NNI,11,86338,-2 WDFC,17,209160,2 TRN,26,680181,3 BBIO,12,884584,-2 Average,16.5,465066,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $465 million. That figure was $289 million in KMT's case. Trinity Industries, Inc. (NYSE:TRN) is the most popular stock in this table. On the other hand Nelnet, Inc. (NYSE:NNI) is the least popular one with only 11 bullish hedge fund positions. Kennametal Inc. (NYSE:KMT) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately KMT wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KMT were disappointed as the stock returned 13.5% in 2019 and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.