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Hedge Funds Cashing Out Of Kirkland Lake Gold Ltd. (KL)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Kirkland Lake Gold Ltd. (NYSE:KL) and determine whether hedge funds had an edge regarding this stock.

Is Kirkland Lake Gold Ltd. (NYSE:KL) ready to rally soon? Hedge funds were becoming less hopeful. The number of long hedge fund bets shrunk by 5 recently. Kirkland Lake Gold Ltd. (NYSE:KL) was in 23 hedge funds’ portfolios at the end of June. The all time high for this statistics is 28. Our calculations also showed that KL 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).

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

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’ 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 58 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.

Eric Sprott Sprott Asset Management

Eric Sprott of Sprott Asset Management

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 recommended this real estate stock to our monthly premium newsletter subscribers after its stock price crashed. 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. With all of this in mind we’re going to view the latest hedge fund action encompassing Kirkland Lake Gold Ltd. (NYSE:KL).

How have hedgies been trading Kirkland Lake Gold Ltd. (NYSE:KL)?

At second quarter’s end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KL over the last 20 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Kirkland Lake Gold Ltd. (NYSE:KL), which was worth $203 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $100.5 million worth of shares. Sprott Asset Management, Paulson & Co, 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 23.35% of its 13F portfolio. Sun Valley Gold is also relatively very bullish on the stock, designating 6.22 percent of its 13F equity portfolio to KL.

Judging by the fact that Kirkland Lake Gold Ltd. (NYSE:KL) has witnessed falling interest from the aggregate hedge fund industry, we can see that there was a specific group of fund managers that slashed their positions entirely heading into Q3. Interestingly, Brad Dunkley and Blair Levinsky’s Waratah Capital Advisors cut the largest investment of all the hedgies tracked by Insider Monkey, totaling close to $12.8 million in stock. Brian Ashford-Russell and Tim Woolley’s fund, Polar Capital, also cut its stock, about $11 million worth. These moves are important to note, as total hedge fund interest dropped by 5 funds heading into Q3.

Let’s go over hedge fund activity in other stocks similar to Kirkland Lake Gold Ltd. (NYSE:KL). We will take a look at Enel Americas S.A. (NYSE:ENIA), Apollo Global Management Inc (NYSE:APO), Dynatrace, Inc. (NYSE:DT), Teledyne Technologies Incorporated (NYSE:TDY), Black Knight, Inc. (NYSE:BKI), Halliburton Company (NYSE:HAL), and Equity Lifestyle Properties, Inc. (NYSE:ELS). This group of stocks’ market caps are similar to KL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ENIA 12 96078 5
APO 29 2070869 -5
DT 41 1061434 6
TDY 34 445927 13
BKI 44 595730 12
HAL 30 717639 -2
ELS 31 442219 0
Average 31.6 775699 4.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.6 hedge funds with bullish positions and the average amount invested in these stocks was $776 million. That figure was $603 million in KL’s case. Black Knight, Inc. (NYSE:BKI) is the most popular stock in this table. On the other hand Enel Americas S.A. (NYSE:ENIA) is the least popular one with only 12 bullish hedge fund positions. Kirkland Lake Gold Ltd. (NYSE:KL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for KL is 41.8. 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. 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 still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on KL as the stock returned 18.5% in the third quarter and outperformed the market by an even larger margin.

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