We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let's see whether Kadant Inc. (NYSE:KAI) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Kadant Inc. (NYSE:KAI) was in 7 hedge funds' portfolios at the end of December. KAI shareholders have witnessed a decrease in hedge fund sentiment recently. There were 12 hedge funds in our database with KAI positions at the end of the previous quarter. Our calculations also showed that KAI isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
If you'd ask most market participants, hedge funds are assumed to be unimportant, outdated investment tools of years past. While there are greater than 8000 funds in operation today, Our experts hone in on the bigwigs of this club, about 850 funds. Most estimates calculate that this group of people direct most of all hedge funds' total asset base, and by keeping track of their top stock picks, Insider Monkey has discovered numerous investment strategies that have historically outrun the market. Insider Monkey's flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .
[caption id="attachment_30621" align="aligncenter" width="400"] Cliff Asness of AQR Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader's corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we're going to take a look at the latest hedge fund action regarding Kadant Inc. (NYSE:KAI).
How have hedgies been trading Kadant Inc. (NYSE:KAI)?
At Q4's end, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -42% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KAI over the last 18 quarters. With hedge funds' sentiment swirling, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Royce & Associates was the largest shareholder of Kadant Inc. (NYSE:KAI), with a stake worth $65.1 million reported as of the end of September. Trailing Royce & Associates was Driehaus Capital, which amassed a stake valued at $7.8 million. Renaissance Technologies, Winton Capital Management, and AQR Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Royce & Associates allocated the biggest weight to Kadant Inc. (NYSE:KAI), around 0.58% of its 13F portfolio. Driehaus Capital is also relatively very bullish on the stock, designating 0.21 percent of its 13F equity portfolio to KAI.
Judging by the fact that Kadant Inc. (NYSE:KAI) has faced falling interest from the smart money, we can see that there lies a certain "tier" of hedge funds that slashed their full holdings last quarter. Intriguingly, Israel Englander's Millennium Management said goodbye to the biggest stake of the 750 funds tracked by Insider Monkey, valued at an estimated $6 million in stock, and Dmitry Balyasny's Balyasny Asset Management was right behind this move, as the fund dumped about $0.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds last quarter.
Let's check out hedge fund activity in other stocks similar to Kadant Inc. (NYSE:KAI). These stocks are Neenah Paper, Inc. (NYSE:NP), Marten Transport, Ltd (NASDAQ:MRTN), First Bancorp (NASDAQ:FBNC), and Athenex, Inc. (NASDAQ:ATNX). This group of stocks' market caps are closest to KAI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NP,11,27598,3 MRTN,17,49426,-6 FBNC,14,84143,-2 ATNX,15,359102,-2 Average,14.25,130067,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $81 million in KAI's case. Marten Transport, Ltd (NASDAQ:MRTN) is the most popular stock in this table. On the other hand Neenah Paper, Inc. (NYSE:NP) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Kadant Inc. (NYSE:KAI) is even less popular than NP. Hedge funds dodged a bullet by taking a bearish stance towards KAI. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but managed to beat the market by 12.9 percentage points. Unfortunately KAI wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); KAI investors were disappointed as the stock returned -20.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.