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Hedge Funds Are Selling K12 Inc. (LRN)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded K12 Inc. (NYSE:LRN) and determine whether the smart money was really smart about this stock.

Is K12 Inc. (NYSE:LRN) a first-rate investment now? Hedge funds were reducing their bets on the stock. The number of bullish hedge fund positions went down by 2 recently. K12 Inc. (NYSE:LRN) was in 18 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 24. Our calculations also showed that LRN 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 20 hedge funds in our database with LRN positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

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 real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. Keeping this in mind let’s take a glance at the new hedge fund action encompassing K12 Inc. (NYSE:LRN).

Hedge fund activity in K12 Inc. (NYSE:LRN)

At second quarter’s end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LRN over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in K12 Inc. (NYSE:LRN) was held by Renaissance Technologies, which reported holding $59.9 million worth of stock at the end of September. It was followed by Portolan Capital Management with a $27 million position. Other investors bullish on the company included D E Shaw, Alyeska Investment Group, and Intrinsic Edge Capital. In terms of the portfolio weights assigned to each position Manatuck Hill Partners allocated the biggest weight to K12 Inc. (NYSE:LRN), around 4.08% of its 13F portfolio. Invenomic Capital Management is also relatively very bullish on the stock, earmarking 3.87 percent of its 13F equity portfolio to LRN.

Seeing as K12 Inc. (NYSE:LRN) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there were a few funds that elected to cut their entire stakes in the second quarter. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dumped the biggest stake of the 750 funds tracked by Insider Monkey, totaling close to $3 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund sold off about $2.7 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 2 funds in the second quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as K12 Inc. (NYSE:LRN) but similarly valued. We will take a look at Cadence Bancorporation (NYSE:CADE), Pliant Therapeutics, Inc. (NASDAQ:PLRX), The RealReal, Inc. (NASDAQ:REAL), Calavo Growers, Inc. (NASDAQ:CVGW), SFL Corporation Ltd. (NYSE:SFL), Health Catalyst, Inc (NASDAQ:HCAT), and NanoString Technologies Inc (NASDAQ:NSTG). All of these stocks’ market caps are closest to LRN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CADE 21 109996 -8
PLRX 13 241772 13
REAL 19 201408 4
CVGW 14 78053 3
SFL 15 41362 1
HCAT 13 116981 -1
NSTG 17 123754 -1
Average 16 130475 1.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $158 million in LRN’s case. Cadence Bancorporation (NYSE:CADE) is the most popular stock in this table. On the other hand Pliant Therapeutics, Inc. (NASDAQ:PLRX) is the least popular one with only 13 bullish hedge fund positions. K12 Inc. (NYSE:LRN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LRN is 56.8. 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 positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 September and beat the market by 19.3 percentage points. Unfortunately LRN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LRN were disappointed as the stock returned -3.3% in Q3 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 many of these stocks already outperformed the market so far this year.

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