How do we determine whether Kennametal Inc. (NYSE:KMT) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Kennametal Inc. (NYSE:KMT) has seen a decrease in activity from the world's largest hedge funds in recent months. Our calculations also showed that KMT isn't among the 30 most popular stocks among hedge funds.
To most investors, hedge funds are seen as worthless, old investment vehicles of years past. While there are over 8000 funds with their doors open at present, We hone in on the bigwigs of this group, about 750 funds. These investment experts preside over the majority of all hedge funds' total capital, and by keeping an eye on their top picks, Insider Monkey has figured out a few investment strategies that have historically defeated the market. Insider Monkey's flagship hedge fund strategy surpassed the S&P 500 index by around 5 percentage points a year since its inception in May 2014 through the end of May. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 30.9% since February 2017 (through May 30th) even though the market was up nearly 24% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 11.9% in less than a couple of weeks whereas our long picks outperformed the market by 2 percentage points in this volatile 2 week period.
[caption id="attachment_735677" align="aligncenter" width="473"] Sander Gerber of Hudson Bay Capital[/caption]
Let's take a peek at the key hedge fund action encompassing Kennametal Inc. (NYSE:KMT).
How have hedgies been trading Kennametal Inc. (NYSE:KMT)?
At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KMT over the last 15 quarters. With hedgies' sentiment swirling, there exists a select group of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Kennametal Inc. (NYSE:KMT) was held by Ariel Investments, which reported holding $196.1 million worth of stock at the end of March. It was followed by Adage Capital Management with a $19.5 million position. Other investors bullish on the company included GAMCO Investors, Renaissance Technologies, and Royce & Associates.
Seeing as Kennametal Inc. (NYSE:KMT) has faced falling interest from the smart money, logic holds that there exists a select few fund managers that slashed their full holdings heading into Q3. Intriguingly, Clint Carlson's Carlson Capital dumped the biggest stake of the 700 funds watched by Insider Monkey, totaling about $9.7 million in stock, and David Tepper's Appaloosa Management LP was right behind this move, as the fund dumped about $6.5 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds heading into Q3.
Let's check out hedge fund activity in other stocks similar to Kennametal Inc. (NYSE:KMT). These stocks are Q2 Holdings Inc (NYSE:QTWO), Red Rock Resorts, Inc. (NASDAQ:RRR), Corporate Office Properties Trust (NYSE:OFC), and Louisiana-Pacific Corporation (NYSE:LPX). This group of stocks' market caps match KMT's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position QTWO,15,67077,3 RRR,17,377954,0 OFC,12,156974,-11 LPX,28,461781,-3 Average,18,265947,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $266 million. That figure was $271 million in KMT's case. Louisiana-Pacific Corporation (NYSE:LPX) is the most popular stock in this table. On the other hand Corporate Office Properties Trust (NYSE:OFC) is the least popular one with only 12 bullish hedge fund positions. Kennametal Inc. (NYSE:KMT) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately KMT wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KMT were disappointed as the stock returned -13.8% during the same 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 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.