The latest 13F reporting period has come and gone, and 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. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.
Is Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) undervalued? Investors who are in the know were buying. The number of bullish hedge fund positions moved up by 4 in recent months. Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) was in 22 hedge funds’ portfolios at the end of June. The all time high for this statistics is 22. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that KTOS 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.
Jonathan Barrett of Luminus 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 precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. 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 take a gander at the recent hedge fund action regarding Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS).
Hedge fund activity in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS)
Heading into the third quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in KTOS over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
More specifically, Alyeska Investment Group was the largest shareholder of Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), with a stake worth $11.3 million reported as of the end of September. Trailing Alyeska Investment Group was Luminus Management, which amassed a stake valued at $5 million. GLG Partners, D E Shaw, and Osterweis Capital Management 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 Pinz Capital allocated the biggest weight to Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), around 1.36% of its 13F portfolio. Diametric Capital is also relatively very bullish on the stock, designating 1.19 percent of its 13F equity portfolio to KTOS.
With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. Alyeska Investment Group, managed by Anand Parekh, established the most outsized position in Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). Alyeska Investment Group had $11.3 million invested in the company at the end of the quarter. Jonathan Barrett and Paul Segal’s Luminus Management also initiated a $5 million position during the quarter. The following funds were also among the new KTOS investors: Noam Gottesman’s GLG Partners, Matthew L Pinz’s Pinz Capital, and Michael Gelband’s ExodusPoint Capital.
Let’s now review hedge fund activity in other stocks similar to Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS). These stocks are Visteon Corp (NASDAQ:VC), Ryman Hospitality Properties, Inc. (NYSE:RHP), Masonite International Corp (NYSE:DOOR), Innospec Inc. (NASDAQ:IOSP), Albany International Corp. (NYSE:AIN), Tenet Healthcare Corp (NYSE:THC), and Prospect Capital Corporation (NASDAQ:PSEC). This group of stocks’ market caps resemble KTOS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VC | 23 | 235975 | 4 |
| RHP | 25 | 311365 | -1 |
| DOOR | 27 | 425530 | 1 |
| IOSP | 18 | 89989 | 4 |
| AIN | 19 | 46345 | 1 |
| THC | 28 | 582586 | -7 |
| PSEC | 7 | 22588 | -1 |
| Average | 21 | 244911 | 0.1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $245 million. That figure was $49 million in KTOS’s case. Tenet Healthcare Corp (NYSE:THC) is the most popular stock in this table. On the other hand Prospect Capital Corporation (NASDAQ:PSEC) is the least popular one with only 7 bullish hedge fund positions. Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KTOS is 74.7. 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 third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on KTOS as the stock returned 23.4% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.
