Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying for a while now that the current market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the third quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Kraton Corporation (NYSE:KRA) changed recently.
Kraton Corporation (NYSE:KRA) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 22 hedge funds' portfolios at the end of September. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as U.S. Physical Therapy, Inc. (NYSE:USPH), WSFS Financial Corporation (NASDAQ:WSFS), and Gran Tierra Energy Inc. (NYSEAMEX:GTE) to gather more data points.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 24% through December 3, 2018. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's analyze the new hedge fund action surrounding Kraton Corporation (NYSE:KRA).
What have hedge funds been doing with Kraton Corporation (NYSE:KRA)?
Heading into the fourth quarter of 2018, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, representing no change from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in KRA over the last 13 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Kraton Corporation (NYSE:KRA), with a stake worth $47.2 million reported as of the end of September. Trailing Renaissance Technologies was Royce & Associates, which amassed a stake valued at $17.8 million. Rubric Capital Management, GLG Partners, and Corsair Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because Kraton Corporation (NYSE:KRA) has witnessed a decline in interest from the aggregate hedge fund industry, we can see that there was a specific group of money managers who were dropping their positions entirely heading into Q3. At the top of the heap, Adam Fox and Samuel Elder's Altalis Capital Partners said goodbye to the biggest position of the 700 funds monitored by Insider Monkey, worth close to $5.7 million in stock. John Overdeck and David Siegel's fund, Two Sigma Advisors, also cut its stock, about $0.8 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to Kraton Corporation (NYSE:KRA). We will take a look at U.S. Physical Therapy, Inc. (NYSE:USPH), WSFS Financial Corporation (NASDAQ:WSFS), Gran Tierra Energy Inc. (NYSEAMEX:GTE), and NMI Holdings Inc (NASDAQ:NMIH). 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 USPH,12,123509,2 WSFS,10,106803,-2 GTE,16,394926,0 NMIH,12,196799,-3 Average,12.5,205509,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $206 million. That figure was $120 million in KRA's case. Gran Tierra Energy Inc. (NYSEAMEX:GTE) is the most popular stock in this table. On the other hand WSFS Financial Corporation (NASDAQ:WSFS) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Kraton Corporation (NYSE:KRA) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.
Disclosure: None. This article was originally published at Insider Monkey.