Billionaire hedge fund managers such as David Abrams, Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.
Is Knowles Corp (NYSE:KN) a bargain? The smart money is in a pessimistic mood. The number of long hedge fund positions decreased by 7 lately. Our calculations also showed that kn isn't among the 30 most popular stocks among hedge funds. KN was in 17 hedge funds' portfolios at the end of March. There were 24 hedge funds in our database with KN positions at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
We're going to check out the new hedge fund action regarding Knowles Corp (NYSE:KN).
What have hedge funds been doing with Knowles Corp (NYSE:KN)?
At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards KN over the last 15 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Ariel Investments held the most valuable stake in Knowles Corp (NYSE:KN), which was worth $76.7 million at the end of the first quarter. On the second spot was Falcon Edge Capital which amassed $71.3 million worth of shares. Moreover, D E Shaw, 13D Management, and HG Vora Capital Management were also bullish on Knowles Corp (NYSE:KN), allocating a large percentage of their portfolios to this stock.
Due to the fact that Knowles Corp (NYSE:KN) has witnessed falling interest from hedge fund managers, it's safe to say that there exists a select few hedgies that slashed their entire stakes by the end of the third quarter. Interestingly, David Harding's Winton Capital Management said goodbye to the largest position of all the hedgies monitored by Insider Monkey, worth an estimated $10.1 million in stock. Israel Englander's fund, Millennium Management, also dropped its stock, about $7.2 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 7 funds by the end of the third quarter.
Let's also examine hedge fund activity in other stocks similar to Knowles Corp (NYSE:KN). We will take a look at Marcus & Millichap Inc (NYSE:MMI), Arch Coal, Inc. (NYSE:ARCH), Mueller Water Products, Inc. (NYSE:MWA), and Guess', Inc. (NYSE:GES). This group of stocks' market values resemble KN's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MMI,12,132716,-1 ARCH,28,326749,3 MWA,18,211351,-6 GES,18,104084,-1 Average,19,193725,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $194 million. That figure was $224 million in KN's case. Arch Coal, Inc. (NYSE:ARCH) is the most popular stock in this table. On the other hand Marcus & Millichap Inc (NYSE:MMI) is the least popular one with only 12 bullish hedge fund positions. Knowles Corp (NYSE:KN) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately KN wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KN investors were disappointed as the stock returned -1.4% during the same time period and underperformed 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.