While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding K12 Inc. (NYSE:LRN).
K12 Inc. (NYSE:LRN) was in 17 hedge funds' portfolios at the end of September. LRN has seen a decrease in hedge fund interest of late. There were 22 hedge funds in our database with LRN positions at the end of the previous quarter. Our calculations also showed that LRN 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.
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_746893" align="aligncenter" width="473"] Paul Marshall of Marshall Wace[/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 gander at the fresh hedge fund action surrounding K12 Inc. (NYSE:LRN).
What have hedge funds been doing with K12 Inc. (NYSE:LRN)?
At Q3's end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -23% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LRN over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies has the largest position in K12 Inc. (NYSE:LRN), worth close to $46.5 million, accounting for less than 0.1%% of its total 13F portfolio. Sitting at the No. 2 spot is D E Shaw, led by David E. Shaw, holding a $29.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions consist of Cliff Asness's AQR Capital Management, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Noam Gottesman's GLG Partners. In terms of the portfolio weights assigned to each position Highland Capital Management allocated the biggest weight to K12 Inc. (NYSE:LRN), around 0.26% of its 13F portfolio. Ellington is also relatively very bullish on the stock, dishing out 0.07 percent of its 13F equity portfolio to LRN.
Because K12 Inc. (NYSE:LRN) has witnessed a decline in interest from hedge fund managers, we can see that there is a sect of fund managers that decided to sell off their entire stakes heading into Q4. Interestingly, Richard Driehaus's Driehaus Capital dumped the largest stake of the 750 funds tracked by Insider Monkey, valued at an estimated $7.2 million in stock, and Principal Global Investors's Columbus Circle Investors was right behind this move, as the fund said goodbye to about $1.6 million worth. These moves are important to note, as total hedge fund interest dropped by 5 funds heading into Q4.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as K12 Inc. (NYSE:LRN) but similarly valued. These stocks are Hess Midstream Partners LP (NYSE:HESM), SecureWorks Corp. (NASDAQ:SCWX), Bitauto Hldg Ltd (NYSE:BITA), and Inogen Inc (NASDAQ:INGN). All of these stocks' market caps resemble LRN's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HESM,7,9217,1 SCWX,9,18937,0 BITA,13,72639,6 INGN,14,136246,-4 Average,10.75,59260,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $59 million. That figure was $134 million in LRN's case. Inogen Inc (NASDAQ:INGN) is the most popular stock in this table. On the other hand Hess Midstream Partners LP (NYSE:HESM) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks K12 Inc. (NYSE:LRN) 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 LRN wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LRN were disappointed as the stock returned -25.6% 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.