U.S. Markets closed

KB Home (KBH) vs. Top 20 Hedge Fund Stocks in 2019

Debasis Saha

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% last year. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like KB Home (NYSE:KBH).

KB Home (NYSE:KBH) investors should pay attention to an increase in hedge fund sentiment lately. Our calculations also showed that KBH isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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_26335" align="alignnone" width="600"] Ken Fisher of Fisher Asset Management[/caption]

Ken Fisher FISHER ASSET MANAGEMENT

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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we're going to check out the new hedge fund action surrounding KB Home (NYSE:KBH).

What have hedge funds been doing with KB Home (NYSE:KBH)?

At Q3's end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 53% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in KBH over the last 17 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Is KBH A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Ken Fisher's Fisher Asset Management has the biggest position in KB Home (NYSE:KBH), worth close to $102.6 million, accounting for 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Ken Griffin of Citadel Investment Group, with a $96.5 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other peers that hold long positions compriseRenaissance Technologies, Cliff Asness's AQR Capital Management and Aaron Cowen's Suvretta Capital Management. In terms of the portfolio weights assigned to each position Impala Asset Management allocated the biggest weight to KB Home (NYSE:KBH), around 1.67% of its 13F portfolio. Waterfront Capital Partners is also relatively very bullish on the stock, dishing out 1.17 percent of its 13F equity portfolio to KBH.

Consequently, key money managers have jumped into KB Home (NYSE:KBH) headfirst. Suvretta Capital Management, managed by Aaron Cowen, created the largest position in KB Home (NYSE:KBH). Suvretta Capital Management had $33 million invested in the company at the end of the quarter. Robert Bishop's Impala Asset Management also initiated a $23.1 million position during the quarter. The other funds with brand new KBH positions are Christian Leone's Luxor Capital Group, Louis Bacon's Moore Global Investments, and Eduardo Abush's Waterfront Capital Partners.

Let's now take a look at hedge fund activity in other stocks similar to KB Home (NYSE:KBH). We will take a look at Valmont Industries, Inc. (NYSE:VMI), BancorpSouth, Inc. (NYSE:BXS), Houlihan Lokey Inc (NYSE:HLI), and Strayer Education Inc (NASDAQ:STRA). This group of stocks' market values are similar to KBH's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VMI,25,288741,0 BXS,12,82186,0 HLI,14,136860,-1 STRA,19,213625,6 Average,17.5,180353,1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $180 million. That figure was $573 million in KBH's case. Valmont Industries, Inc. (NYSE:VMI) is the most popular stock in this table. On the other hand BancorpSouth, Inc. (NYSE:BXS) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks KB Home (NYSE:KBH) is more popular among hedge funds. 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. Hedge funds were also right about betting on KBH as the stock returned 80.9% in 2019 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Disclosure: None. This article was originally published at Insider Monkey.

Related Content