We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 KB Home (NYSE:KBH).
KB Home (NYSE:KBH) has experienced an increase in activity from the world's largest hedge funds in recent months. Our calculations also showed that KBH isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' 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 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 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.
[caption id="attachment_670377" align="aligncenter" width="473"] Aaron Cowen of Suvretta Capital Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the recent hedge fund action regarding KB Home (NYSE:KBH).
How have hedgies been trading KB Home (NYSE:KBH)?
Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 53% from one quarter earlier. By comparison, 17 hedge funds held shares or bullish call options in KBH a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in KB Home (NYSE:KBH) was held by Fisher Asset Management, which reported holding $102.6 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $96.5 million position. Other investors bullish on the company included Renaissance Technologies, AQR Capital Management, and Suvretta Capital Management. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to KB Home (NYSE:KBH), around 1.67% of its portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, designating 1.17 percent of its 13F equity portfolio to KBH.
As industrywide interest jumped, key money managers were breaking ground themselves. Suvretta Capital Management, managed by Aaron Cowen, established the biggest position in KB Home (NYSE:KBH). Suvretta Capital Management had $33 million invested in the company at the end of the quarter. Robert Bishop's Impala Asset Management also initiated a $23.1 million position during the quarter. The other funds with new positions in the stock are Christian Leone's Luxor Capital Group, Louis Bacon's Moore Global Investments, and Eduardo Abush's Waterfront Capital Partners.
Let's now take a look at hedge fund activity in other stocks similar to KB Home (NYSE:KBH). We will take a look at Valmont Industries, Inc. (NYSE:VMI), BancorpSouth Bank (NYSE:BXS), Houlihan Lokey Inc (NYSE:HLI), and Strategic Education, Inc. (NASDAQ:STRA). This group of stocks' market values resemble KBH's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VMI,25,288741,0 BXS,12,82186,0 HLI,14,136860,-1 STRA,19,213625,6 Average,17.5,180353,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $180 million. That figure was $573 million in KBH's case. Valmont Industries, Inc. (NYSE:VMI) is the most popular stock in this table. On the other hand BancorpSouth Bank (NYSE:BXS) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks KB Home (NYSE:KBH) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately KBH wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KBH were disappointed as the stock returned 2% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.