Do Hedge Funds Love Kratos Defense & Security Solutions, Inc (KTOS)?

Out of thousands of stocks that are currently traded on the market, it is difficult to determine those that can 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 over 700 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).

Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) shareholders have witnessed an increase in hedge fund interest of late. KTOS was in 13 hedge funds’ portfolios at the end of the third quarter of 2018. There were 12 hedge funds in our database with KTOS positions at the end of the previous quarter. Our calculations also showed that ktos isn’t among the 30 most popular stocks among hedge funds.

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.

Chuck Royce

Let’s go over the recent hedge fund action regarding Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).

What does the smart money think about Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS)?

At Q3’s end, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards KTOS 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.

No of Hedge Funds with KTOS Positions

More specifically, Daruma Asset Management was the largest shareholder of Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), with a stake worth $46.2 million reported as of the end of September. Trailing Daruma Asset Management was Royce & Associates, which amassed a stake valued at $28.2 million. Millennium Management, SG Capital Management, and Impala Asset Management were also very fond of the stock, giving the stock large weights in their portfolios.

As aggregate interest increased, key hedge funds have jumped into Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) headfirst. Driehaus Capital, managed by Richard Driehaus, established the biggest position in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). Driehaus Capital had $9.7 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also initiated a $1.2 million position during the quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) but similarly valued. We will take a look at Oclaro, Inc. (NASDAQ:OCLR), Oxford Industries, Inc. (NYSE:OXM), BJ’s Restaurants, Inc. (NASDAQ:BJRI), and Editas Medicine, Inc. (NASDAQ:EDIT). This group of stocks’ market caps are closest to KTOS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OCLR 22 137595 3
OXM 13 70925 0
BJRI 20 195394 4
EDIT 17 148184 0
Average 18 138025 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $138 million. That figure was $133 million in KTOS’s case. Oclaro, Inc. (NASDAQ:OCLR) is the most popular stock in this table. On the other hand Oxford Industries, Inc. (NYSE:OXM) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) is even less popular than OXM. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

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