"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards Kadmon Holdings, Inc. (NYSE:KDMN) and see how it was affected.
Hedge fund interest in Kadmon Holdings, Inc. (NYSE:KDMN) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare KDMN to other stocks including Business First Bancshares, Inc. (NASDAQ:BFST), Limoneira Company (NASDAQ:LMNR), and Ranpak Holdings Corp (NYSE:PACK) to get a better sense of its popularity. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
[caption id="attachment_315167" align="alignnone" width="600"] Dan Loeb of Third Point[/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. 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 also rely on the best performing hedge funds' buy/sell signals. Let's analyze the new hedge fund action encompassing Kadmon Holdings, Inc. (NYSE:KDMN).
How are hedge funds trading Kadmon Holdings, Inc. (NYSE:KDMN)?
Heading into the fourth quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 13 hedge funds with a bullish position in KDMN a year ago. 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, Perceptive Advisors held the most valuable stake in Kadmon Holdings, Inc. (NYSE:KDMN), which was worth $33.2 million at the end of the third quarter. On the second spot was Vivo Capital which amassed $31.8 million worth of shares. Consonance Capital Management, Third Point, 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 Puissance Capital Management allocated the biggest weight to Kadmon Holdings, Inc. (NYSE:KDMN), around 16.79% of its 13F portfolio. Vivo Capital is also relatively very bullish on the stock, designating 3.61 percent of its 13F equity portfolio to KDMN.
Judging by the fact that Kadmon Holdings, Inc. (NYSE:KDMN) has faced a decline in interest from the smart money, we can see that there was a specific group of hedgies that decided to sell off their positions entirely in the third quarter. At the top of the heap, Noam Gottesman's GLG Partners sold off the biggest investment of the 750 funds followed by Insider Monkey, valued at an estimated $0.1 million in stock, and David E. Shaw's D E Shaw was right behind this move, as the fund cut about $0 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's go over hedge fund activity in other stocks similar to Kadmon Holdings, Inc. (NYSE:KDMN). We will take a look at Business First Bancshares, Inc. (NASDAQ:BFST), Limoneira Company (NASDAQ:LMNR), Ranpak Holdings Corp (NYSE:PACK), and Anworth Mortgage Asset Corporation (NYSE:ANH). This group of stocks' market valuations resemble KDMN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BFST,2,14267,1 LMNR,6,3407,4 PACK,14,179385,-2 ANH,14,30078,0 Average,9,56784,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $57 million. That figure was $145 million in KDMN's case. Ranpak Holdings Corp (NYSE:PACK) is the most popular stock in this table. On the other hand Business First Bancshares, Inc. (NASDAQ:BFST) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Kadmon Holdings, Inc. (NYSE:KDMN) 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. Hedge funds were also right about betting on KDMN as the stock returned 75.4% during the first two months of Q4 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.