At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards KB Home (NYSE:KBH) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is KB Home (NYSE:KBH) a bargain? Prominent investors were in a pessimistic mood. The number of bullish hedge fund bets decreased by 2 recently. KB Home (NYSE:KBH) was in 23 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 29. Our calculations also showed that KBH isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 25 hedge funds in our database with KBH holdings at the end of March.
Video: Watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now let’s check out the new hedge fund action surrounding KB Home (NYSE:KBH).
How have hedgies been trading KB Home (NYSE:KBH)?
Heading into the third quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards KBH over the last 20 quarters. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Fisher Asset Management, managed by Ken Fisher, holds the number one position in KB Home (NYSE:KBH). Fisher Asset Management has a $84.8 million position in the stock, comprising 0.1% of its 13F portfolio. On Fisher Asset Management’s heels is Greenhaven Associates, managed by Edgar Wachenheim, which holds a $55.5 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that hold long positions comprise Cliff Asness’s AQR Capital Management, Ken Heebner’s Capital Growth Management and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position Capital Growth Management allocated the biggest weight to KB Home (NYSE:KBH), around 5.81% of its 13F portfolio. Greenhaven Associates is also relatively very bullish on the stock, earmarking 1.23 percent of its 13F equity portfolio to KBH.
Seeing as KB Home (NYSE:KBH) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there were a few fund managers that slashed their positions entirely by the end of the second quarter. At the top of the heap, Robert Bishop’s Impala Asset Management sold off the largest stake of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $19.6 million in stock. Boaz Weinstein’s fund, Saba Capital, also dumped its stock, about $5.8 million worth. These moves are important to note, as total hedge fund interest fell by 2 funds by the end of the second quarter.
Let’s also examine hedge fund activity in other stocks similar to KB Home (NYSE:KBH). We will take a look at Bandwidth Inc. (NASDAQ:BAND), Inovalon Holdings Inc (NASDAQ:INOV), Lazard Ltd (NYSE:LAZ), Proto Labs Inc (NYSE:PRLB), Granite Real Estate Investment Trust (NYSE:GRP), Companhia Energetica de Minas Gerais (NYSE:CIG), and Gates Industrial Corporation plc (NYSE:GTES). This group of stocks’ market values match KBH’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.7 hedge funds with bullish positions and the average amount invested in these stocks was $143 million. That figure was $334 million in KBH’s case. Bandwidth Inc. (NASDAQ:BAND) is the most popular stock in this table. On the other hand Granite Real Estate Investment Trust (NYSE:GRP) is the least popular one with only 6 bullish hedge fund positions. KB Home (NYSE:KBH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KBH is 62.2. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on KBH as the stock returned 25.5% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.