Before we spend days researching a stock idea we like to take a look at how hedge funds and billionaire investors recently traded that stock. Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018. This means hedge funds that are allocating a higher percentage of their portfolio to small-cap stocks were probably underperforming the market. However, this also means that as small-cap stocks start to mean revert, these hedge funds will start delivering better returns than the S&P 500 Index funds. In this article, we will take a look at what hedge funds think about KB Home (NYSE:KBH).
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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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to review the key hedge fund action encompassing KB Home (NYSE:KBH).
What have hedge funds been doing with KB Home (NYSE:KBH)?
Heading into the third quarter of 2019, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the first quarter of 2019. By comparison, 14 hedge funds held shares or bullish call options in KBH a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Millennium Management was the largest shareholder of KB Home (NYSE:KBH), with a stake worth $94.3 million reported as of the end of March. Trailing Millennium Management was Fisher Asset Management, which amassed a stake valued at $78.4 million. Balyasny Asset Management, Renaissance Technologies, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Due to the fact that KB Home (NYSE:KBH) has experienced bearish sentiment from the smart money, we can see that there lies a certain "tier" of money managers who sold off their full holdings heading into Q3. Intriguingly, Anthony Bozza's Lakewood Capital Management said goodbye to the largest position of the "upper crust" of funds watched by Insider Monkey, valued at close to $26.5 million in stock. John Khoury's fund, Long Pond Capital, also said goodbye to its stock, about $13.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 4 funds heading into Q3.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as KB Home (NYSE:KBH) but similarly valued. These stocks are Innospec Inc. (NASDAQ:IOSP), Carpenter Technology Corporation (NYSE:CRS), Yext, Inc. (NYSE:YEXT), and The Hain Celestial Group, Inc. (NASDAQ:HAIN). This group of stocks' market values match KBH's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IOSP,13,72763,-1 CRS,12,61839,-1 YEXT,21,186091,-2 HAIN,17,545406,4 Average,15.75,216525,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $217 million. That figure was $493 million in KBH's case. Yext, Inc. (NYSE:YEXT) is the most popular stock in this table. On the other hand Carpenter Technology Corporation (NYSE:CRS) is the least popular one with only 12 bullish hedge fund positions. KB Home (NYSE:KBH) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on KBH as the stock returned 32.6% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
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