We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Kennametal Inc. (NYSE:KMT) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Kennametal Inc. (NYSE:KMT) was in 19 hedge funds’ portfolios at the end of December. KMT has experienced a decrease in support from the world’s most elite money managers recently. There were 27 hedge funds in our database with KMT positions at the end of the previous quarter. Our calculations also showed that KMT isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Ray Dalio of Bridgewater Associates
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s analyze the fresh hedge fund action regarding Kennametal Inc. (NYSE:KMT).
How have hedgies been trading Kennametal Inc. (NYSE:KMT)?
At the end of the fourth quarter, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -30% from the third quarter of 2019. On the other hand, there were a total of 21 hedge funds with a bullish position in KMT a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
Among these funds, Ariel Investments held the most valuable stake in Kennametal Inc. (NYSE:KMT), which was worth $212 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $23.6 million worth of shares. GAMCO Investors, AQR Capital Management, and Interval Partners 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 Southport Management allocated the biggest weight to Kennametal Inc. (NYSE:KMT), around 2.81% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, dishing out 2.66 percent of its 13F equity portfolio to KMT.
Due to the fact that Kennametal Inc. (NYSE:KMT) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few fund managers that elected to cut their positions entirely heading into Q4. Intriguingly, Phill Gross and Robert Atchinson’s Adage Capital Management said goodbye to the largest investment of all the hedgies monitored by Insider Monkey, totaling an estimated $19.7 million in stock. Renaissance Technologies, also cut its stock, about $9.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 8 funds heading into Q4.
Let’s go over hedge fund activity in other stocks similar to Kennametal Inc. (NYSE:KMT). These stocks are Brady Corp (NYSE:BRC), Virtu Financial Inc (NASDAQ:VIRT), Simmons First National Corporation (NASDAQ:SFNC), and NeoGenomics, Inc. (NASDAQ:NEO). This group of stocks’ market caps are similar to KMT’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BRC | 15 | 212707 | -5 |
| VIRT | 15 | 93346 | -3 |
| SFNC | 6 | 25107 | -5 |
| NEO | 12 | 48630 | -2 |
| Average | 12 | 94948 | -3.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $268 million in KMT’s case. Brady Corp (NYSE:BRC) is the most popular stock in this table. On the other hand Simmons First National Corporation (NASDAQ:SFNC) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Kennametal Inc. (NYSE:KMT) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately KMT wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KMT were disappointed as the stock returned -48.8% during the first two and a half months of 2020 (through March 25th) 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 most of these stocks already outperformed the market in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
