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Kohl’s Corporation (KSS) vs. Hedge Fund Favorites in 2019

Reymerlyn Martin

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 Kohl's Corporation (NYSE:KSS).

Is Kohl's Corporation (NYSE:KSS) a buy, sell, or hold? The best stock pickers are getting less bullish. The number of bullish hedge fund bets went down by 2 in recent months. Our calculations also showed that KSS 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). KSS was in 27 hedge funds' portfolios at the end of the third quarter of 2019. There were 29 hedge funds in our database with KSS holdings at the end of the previous quarter.

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' 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_256989" align="aligncenter" width="600"] Dmitry Balyasny of Balyasny Asset Managemnet[/caption]

Dmitry Balyasny of Balyasny Asset Managemnet

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. Now let's analyze the latest hedge fund action surrounding Kohl's Corporation (NYSE:KSS).

What have hedge funds been doing with Kohl's Corporation (NYSE:KSS)?

Heading into the fourth quarter of 2019, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards KSS over the last 17 quarters. With the smart money's capital changing hands, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

The largest stake in Kohl's Corporation (NYSE:KSS) was held by AQR Capital Management, which reported holding $237.2 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $73.5 million position. Other investors bullish on the company included Balyasny Asset Management, Bridgewater Associates, and Steadfast Capital Management. In terms of the portfolio weights assigned to each position Woodson Capital Management allocated the biggest weight to Kohl's Corporation (NYSE:KSS), around 0.77% of its 13F portfolio. Buckingham Capital Management is also relatively very bullish on the stock, designating 0.59 percent of its 13F equity portfolio to KSS.

Since Kohl's Corporation (NYSE:KSS) has witnessed declining sentiment from hedge fund managers, logic holds that there lies a certain "tier" of money managers who sold off their full holdings by the end of the third quarter. Intriguingly, Renaissance Technologies dumped the largest investment of the "upper crust" of funds followed by Insider Monkey, worth about $149.7 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund cut about $34.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds by the end of the third quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Kohl's Corporation (NYSE:KSS) but similarly valued. These stocks are Caesars Entertainment Corp (NASDAQ:CZR), ON Semiconductor Corporation (NASDAQ:ON), Zions Bancorporation, National Association (NASDAQ:ZION), and Kilroy Realty Corp (NYSE:KRC). This group of stocks' market values resemble KSS's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CZR,45,3756323,-3 ON,22,428054,-4 ZION,29,468677,-6 KRC,23,218142,7 Average,29.75,1217799,-1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $1218 million. That figure was $495 million in KSS's case. Caesars Entertainment Corp (NASDAQ:CZR) is the most popular stock in this table. On the other hand ON Semiconductor Corporation (NASDAQ:ON) is the least popular one with only 22 bullish hedge fund positions. Kohl's Corporation (NYSE:KSS) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately KSS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KSS investors were disappointed as the stock returned -19.2% in 2019 and trailed 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 65 percent of these stocks already outperformed the market in 2019. 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.

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