Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like KEMET Corporation (NYSE:KEM).
KEMET Corporation (NYSE:KEM) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was very bullish at the end of September. The stock was in 18 hedge funds' portfolios at the end of the third quarter of 2019. At the end of this article we will also compare KEM to other stocks including Mesa Laboratories, Inc. (NASDAQ:MLAB), Victory Capital Holdings, Inc. (NASDAQ:VCTR), and GasLog Ltd (NYSE:GLOG) 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.
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_747612" align="aligncenter" width="473"] Eric Singer of VIEX Capital[/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. We're going to take a glance at the latest hedge fund action encompassing KEMET Corporation (NYSE:KEM).
What have hedge funds been doing with KEMET Corporation (NYSE:KEM)?
At the end of the third quarter, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards KEM over the last 17 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, Point72 Asset Management held the most valuable stake in KEMET Corporation (NYSE:KEM), which was worth $33.2 million at the end of the third quarter. On the second spot was Nokomis Capital which amassed $26.9 million worth of shares. Renaissance Technologies, Raging Capital Management, and Divisar Capital 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 VIEX Capital Advisors allocated the biggest weight to KEMET Corporation (NYSE:KEM), around 8.87% of its 13F portfolio. Nokomis Capital is also relatively very bullish on the stock, earmarking 5.81 percent of its 13F equity portfolio to KEM.
Since KEMET Corporation (NYSE:KEM) has faced bearish sentiment from the aggregate hedge fund industry, it's easy to see that there exists a select few hedge funds who sold off their entire stakes in the third quarter. It's worth mentioning that John Overdeck and David Siegel's Two Sigma Advisors sold off the biggest stake of the "upper crust" of funds tracked by Insider Monkey, valued at close to $1.2 million in stock, and Mike Vranos's Ellington was right behind this move, as the fund dumped about $1.1 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as KEMET Corporation (NYSE:KEM) but similarly valued. These stocks are Mesa Laboratories, Inc. (NASDAQ:MLAB), Victory Capital Holdings, Inc. (NASDAQ:VCTR), GasLog Ltd (NYSE:GLOG), and Southwestern Energy Company (NYSE:SWN). This group of stocks' market caps are closest to KEM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MLAB,8,97695,0 VCTR,12,48212,0 GLOG,13,43502,0 SWN,14,144813,-4 Average,11.75,83556,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $181 million in KEM's case. Southwestern Energy Company (NYSE:SWN) is the most popular stock in this table. On the other hand Mesa Laboratories, Inc. (NASDAQ:MLAB) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks KEMET Corporation (NYSE:KEM) 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 KEM as the stock returned 47% 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.