It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Kirkland Lake Gold Ltd. (NYSE:KL).
Is Kirkland Lake Gold Ltd. (NYSE:KL) a buy here? Prominent investors are getting less optimistic. The number of bullish hedge fund bets were cut by 5 in recent months. Our calculations also showed that KL isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). KL was in 16 hedge funds’ portfolios at the end of September. There were 21 hedge funds in our database with KL positions at the end of the previous quarter.
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
John Overdeck of Two Sigma Advisors
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the key hedge fund action regarding Kirkland Lake Gold Ltd. (NYSE:KL).
What does smart money think about Kirkland Lake Gold Ltd. (NYSE:KL)?
At the end of the third quarter, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -24% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in KL over the last 17 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Renaissance Technologies held the most valuable stake in Kirkland Lake Gold Ltd. (NYSE:KL), which was worth $95.8 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $70.4 million worth of shares. Polar Capital, GLG Partners, and Two Sigma Advisors 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 Greywolf Capital Management allocated the biggest weight to Kirkland Lake Gold Ltd. (NYSE:KL), around 10.57% of its 13F portfolio. Sprott Asset Management is also relatively very bullish on the stock, designating 2 percent of its 13F equity portfolio to KL.
Judging by the fact that Kirkland Lake Gold Ltd. (NYSE:KL) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there lies a certain “tier” of fund managers that slashed their entire stakes by the end of the third quarter. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace sold off the biggest stake of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $1.8 million in stock. Steve Cohen’s fund, Point72 Asset Management, also said goodbye to its stock, about $1.1 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 5 funds by the end of the third quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Kirkland Lake Gold Ltd. (NYSE:KL) but similarly valued. These stocks are Lennox International Inc. (NYSE:LII), Henry Schein, Inc. (NASDAQ:HSIC), WestRock Company (NYSE:WRK), and Targa Resources Corp (NYSE:TRGP). This group of stocks’ market valuations are closest to KL’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LII | 21 | 193706 | 0 |
| HSIC | 22 | 1248443 | -2 |
| WRK | 26 | 606489 | 0 |
| TRGP | 16 | 241333 | -2 |
| Average | 21.25 | 572493 | -1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $572 million. That figure was $376 million in KL’s case. WestRock Company (NYSE:WRK) is the most popular stock in this table. On the other hand Targa Resources Corp (NYSE:TRGP) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Kirkland Lake Gold Ltd. (NYSE:KL) is even less popular than TRGP. Hedge funds dodged a bullet by taking a bearish stance towards KL. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately KL wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); KL investors were disappointed as the stock returned -6.5% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
