Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees during the first half of 2019 amid Powell's pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the second quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Kraton Corporation (NYSE:KRA).
Kraton Corporation (NYSE:KRA) was in 17 hedge funds' portfolios at the end of June. KRA has experienced a decrease in activity from the world's largest hedge funds recently. There were 19 hedge funds in our database with KRA positions at the end of the previous quarter. Our calculations also showed that KRA isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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. Let's check out the fresh hedge fund action surrounding Kraton Corporation (NYSE:KRA).
Hedge fund activity in Kraton Corporation (NYSE:KRA)
At the end of the second quarter, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in KRA a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Kraton Corporation (NYSE:KRA), with a stake worth $22.1 million reported as of the end of March. Trailing Renaissance Technologies was Royce & Associates, which amassed a stake valued at $18.8 million. Corsair Capital Management, GLG Partners, and Gotham Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.
Since Kraton Corporation (NYSE:KRA) has witnessed falling interest from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of funds that decided to sell off their entire stakes in the second quarter. At the top of the heap, Dmitry Balyasny's Balyasny Asset Management sold off the biggest investment of the "upper crust" of funds watched by Insider Monkey, comprising close to $1 million in stock, and Paul Tudor Jones's Tudor Investment Corp was right behind this move, as the fund dropped about $0.8 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 2 funds in the second quarter.
Let's check out hedge fund activity in other stocks similar to Kraton Corporation (NYSE:KRA). We will take a look at Universal Insurance Holdings, Inc. (NYSE:UVE), PGT Innovations Inc. (NYSE:PGTI), Orthofix Medical Inc. (NASDAQ:OFIX), and Boston Private Financial Holdings, Inc. (NASDAQ:BPFH). This group of stocks' market values resemble KRA's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UVE,14,59222,1 PGTI,19,124425,-2 OFIX,13,83112,-6 BPFH,13,62360,-1 Average,14.75,82280,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $82 million. That figure was $84 million in KRA's case. PGT Innovations Inc. (NYSE:PGTI) is the most popular stock in this table. On the other hand Orthofix Medical Inc. (NASDAQ:OFIX) is the least popular one with only 13 bullish hedge fund positions. Kraton Corporation (NYSE:KRA) 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 KRA, though not to the same extent, as the stock returned 3.9% during the third quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.