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Were Hedge Funds Right About QuantumScape Corporation (QS)?

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Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 900 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about QuantumScape Corporation (NYSE:QS).

QuantumScape Corporation (NYSE:QS) investors should pay attention to a decrease in support from the world's most elite money managers of late. QuantumScape Corporation (NYSE:QS) was in 26 hedge funds' portfolios at the end of June. The all time high for this statistic is 35. There were 29 hedge funds in our database with QS positions at the end of the first quarter. Our calculations also showed that QS isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 percentage points since March 2017 (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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let's go over the latest hedge fund action encompassing QuantumScape Corporation (NYSE:QS).

Do Hedge Funds Think QS Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in QS a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Is QS A Good Stock To Buy?
Is QS A Good Stock To Buy?

More specifically, JS Capital was the largest shareholder of QuantumScape Corporation (NYSE:QS), with a stake worth $67.2 million reported as of the end of June. Trailing JS Capital was Soros Fund Management, which amassed a stake valued at $47.1 million. Inherent Group, Citadel Investment Group, and Coatue 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 Corriente Advisors allocated the biggest weight to QuantumScape Corporation (NYSE:QS), around 5.32% of its 13F portfolio. JS Capital is also relatively very bullish on the stock, setting aside 3.25 percent of its 13F equity portfolio to QS.

Because QuantumScape Corporation (NYSE:QS) has faced bearish sentiment from the entirety of the hedge funds we track, it's easy to see that there was a specific group of fund managers that decided to sell off their positions entirely heading into Q3. It's worth mentioning that Joseph Samuels's Islet Management said goodbye to the largest investment of the 750 funds followed by Insider Monkey, valued at about $35.7 million in stock, and Benjamin A. Smith's Laurion Capital Management was right behind this move, as the fund said goodbye to about $8 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 3 funds heading into Q3.

Let's go over hedge fund activity in other stocks similar to QuantumScape Corporation (NYSE:QS). These stocks are Dropbox, Inc. (NASDAQ:DBX), Medical Properties Trust, Inc. (NYSE:MPW), Lamb Weston Holdings, Inc. (NYSE:LW), Chegg Inc (NYSE:CHGG), Trex Company, Inc. (NYSE:TREX), Grifols SA (NASDAQ:GRFS), and The Toro Company (NYSE:TTC). All of these stocks' market caps match QS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DBX,39,929444,8 MPW,19,266856,-4 LW,36,692976,-2 CHGG,38,667256,5 TREX,25,206431,2 GRFS,14,283634,2 TTC,32,976252,0 Average,29,574693,1.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $575 million. That figure was $321 million in QS's case. Dropbox, Inc. (NASDAQ:DBX) is the most popular stock in this table. On the other hand Grifols SA (NASDAQ:GRFS) is the least popular one with only 14 bullish hedge fund positions. QuantumScape Corporation (NYSE:QS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for QS is 48.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and surpassed the market again by 3.1 percentage points. Unfortunately QS wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); QS investors were disappointed as the stock returned 6% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.

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