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Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 817 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Kadant Inc. (NYSE:KAI).
Is KAI a good stock to buy now? Kadant Inc. (NYSE:KAI) was in 8 hedge funds' portfolios at the end of September. The all time high for this statistics is 17. KAI investors should pay attention to an increase in hedge fund interest in recent months. There were 5 hedge funds in our database with KAI holdings at the end of June. Our calculations also showed that KAI isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: 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 a select group of hedge fund holdings outperformed the S&P 500 ETFs by 66 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Gavin Saitowitz of Prelude Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 5 best cheap stocks to buy according to Ray Dalio to identify stocks with upside potential. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now we're going to analyze the new hedge fund action encompassing Kadant Inc. (NYSE:KAI).
Hedge fund activity in Kadant Inc. (NYSE:KAI)
Heading into the fourth quarter of 2020, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 60% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KAI over the last 21 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.
More specifically, Royce & Associates was the largest shareholder of Kadant Inc. (NYSE:KAI), with a stake worth $59.9 million reported as of the end of September. Trailing Royce & Associates was ExodusPoint Capital, which amassed a stake valued at $1.7 million. Balyasny Asset Management, Millennium Management, and AQR Capital 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 Royce & Associates allocated the biggest weight to Kadant Inc. (NYSE:KAI), around 0.65% of its 13F portfolio. ExodusPoint Capital is also relatively very bullish on the stock, designating 0.03 percent of its 13F equity portfolio to KAI.
As aggregate interest increased, key hedge funds have been driving this bullishness. ExodusPoint Capital, managed by Michael Gelband, initiated the biggest position in Kadant Inc. (NYSE:KAI). ExodusPoint Capital had $1.7 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also initiated a $1.2 million position during the quarter. The other funds with new positions in the stock are Israel Englander's Millennium Management and Gavin Saitowitz and Cisco J. del Valle's Prelude Capital (previously Springbok Capital).
Let's check out hedge fund activity in other stocks similar to Kadant Inc. (NYSE:KAI). We will take a look at Trillium Therapeutics Inc. (NASDAQ:TRIL), First Merchants Corporation (NASDAQ:FRME), Alexander's, Inc. (NYSE:ALX), Seabridge Gold, Inc. (NYSE:SA), CBIZ, Inc. (NYSE:CBZ), ACM Research, Inc. (NASDAQ:ACMR), and Columbia Property Trust Inc (NYSE:CXP). All of these stocks' market caps are similar to KAI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRIL,32,464628,7 FRME,15,65819,4 ALX,10,99516,2 SA,10,68702,2 CBZ,14,182425,0 ACMR,16,129786,5 CXP,15,47691,-1 Average,16,151224,2.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $151 million. That figure was $64 million in KAI's case. Trillium Therapeutics Inc. (NASDAQ:TRIL) is the most popular stock in this table. On the other hand Alexander's, Inc. (NYSE:ALX) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Kadant Inc. (NYSE:KAI) is even less popular than ALX. Our overall hedge fund sentiment score for KAI is 22.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Hedge funds clearly dropped the ball on KAI as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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 percentage points. These stocks gained 31.6% in 2020 through December 2nd and still beat the market by 16 percentage points. A small number of hedge funds were also right about betting on KAI as the stock returned 19.9% since Q3 (through December 2nd) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.