Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Korn Ferry (NYSE:KFY).
Korn Ferry (NYSE:KFY) has seen a decrease in hedge fund interest recently. Our calculations also showed that KFY isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 S&P 500 ETFs by more than 41 percentage points since March 2017 (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 stocks that are in our short portfolio.
[caption id="attachment_728717" align="aligncenter" width="400"] Roger Ibbotson of Zebra Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Keeping this in mind we're going to take a gander at the fresh hedge fund action regarding Korn Ferry (NYSE:KFY).
What have hedge funds been doing with Korn Ferry (NYSE:KFY)?
At the end of the fourth quarter, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -30% from the previous quarter. On the other hand, there were a total of 21 hedge funds with a bullish position in KFY 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.
The largest stake in Korn Ferry (NYSE:KFY) was held by Royce & Associates, which reported holding $33.8 million worth of stock at the end of September. It was followed by Ariel Investments with a $22.8 million position. Other investors bullish on the company included Kerrisdale Capital, Two Sigma Advisors, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Kerrisdale Capital allocated the biggest weight to Korn Ferry (NYSE:KFY), around 8.03% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, designating 0.85 percent of its 13F equity portfolio to KFY.
Since Korn Ferry (NYSE:KFY) has experienced falling interest from the smart money, it's easy to see that there was a specific group of fund managers who sold off their positions entirely heading into Q4. Intriguingly, Ken Griffin's Citadel Investment Group dropped the largest stake of the "upper crust" of funds monitored by Insider Monkey, totaling close to $4.7 million in stock, and Paul Marshall and Ian Wace's Marshall Wace LLP was right behind this move, as the fund dumped about $4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 8 funds heading into Q4.
Let's also examine hedge fund activity in other stocks similar to Korn Ferry (NYSE:KFY). We will take a look at Meritage Homes Corp (NYSE:MTH), Altra Industrial Motion Corp. (NASDAQ:AIMC), Holly Energy Partners, L.P. (NYSE:HEP), and Urban Edge Properties (NYSE:UE). This group of stocks' market valuations are closest to KFY's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MTH,29,249798,0 AIMC,15,202883,0 HEP,5,21261,-1 UE,19,86028,6 Average,17,139993,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $140 million. That figure was $177 million in KFY's case. Meritage Homes Corp (NYSE:MTH) is the most popular stock in this table. On the other hand Holly Energy Partners, L.P. (NYSE:HEP) is the least popular one with only 5 bullish hedge fund positions. Korn Ferry (NYSE:KFY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately KFY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KFY were disappointed as the stock returned -40.1% 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.