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Hedge Funds Have Never Been This Bullish On K12 Inc. (LRN)

Abigail Fisher

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like K12 Inc. (NYSE:LRN).

K12 Inc. (NYSE:LRN) has experienced an increase in hedge fund interest lately. Our calculations also showed that LRN isn't among the 30 most popular stocks among hedge funds.

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.

Richard Driehaus

We're going to take a gander at the key hedge fund action encompassing K12 Inc. (NYSE:LRN).

How are hedge funds trading K12 Inc. (NYSE:LRN)?

At Q4's end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards LRN over the last 14 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.

LRN_apr2019

Among these funds, Renaissance Technologies held the most valuable stake in K12 Inc. (NYSE:LRN), which was worth $42.8 million at the end of the fourth quarter. On the second spot was D E Shaw which amassed $26.4 million worth of shares. Moreover, GLG Partners, Millennium Management, and Arrowstreet Capital were also bullish on K12 Inc. (NYSE:LRN), allocating a large percentage of their portfolios to this stock.

Now, key hedge funds were leading the bulls' herd. PEAK6 Capital Management, managed by Matthew Hulsizer, assembled the biggest call position in K12 Inc. (NYSE:LRN). PEAK6 Capital Management had $0.6 million invested in the company at the end of the quarter. Thomas Bailard's Bailard Inc also initiated a $0.6 million position during the quarter. The following funds were also among the new LRN investors: Richard Driehaus's Driehaus Capital, Josh Goldberg's G2 Investment Partners Management, and Minhua Zhang's Weld Capital Management.

Let's check out hedge fund activity in other stocks similar to K12 Inc. (NYSE:LRN). These stocks are Neenah, Inc. (NYSE:NP), Orthofix Medical Inc. (NASDAQ:OFIX), Tricida, Inc. (NASDAQ:TCDA), and Golub Capital BDC Inc (NASDAQ:GBDC). This group of stocks' market valuations resemble LRN's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NP,4,6594,-3 OFIX,18,78224,1 TCDA,13,406032,-2 GBDC,10,28292,0 Average,11.25,129786,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.25 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $153 million in LRN's case. Orthofix Medical Inc. (NASDAQ:OFIX) is the most popular stock in this table. On the other hand Neenah, Inc. (NYSE:NP) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks K12 Inc. (NYSE:LRN) is more popular among hedge funds. 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 LRN as the stock returned 42.8% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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