There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don’t cover. Because of Carl Icahn and other elite funds’ exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze K12 Inc. (NYSE:LRN).
K12 Inc. (NYSE:LRN) shareholders have witnessed a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that LRN isn’t among the 30 most popular stocks among hedge funds (see the video below).
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a peek at the fresh hedge fund action regarding K12 Inc. (NYSE:LRN).
Hedge fund activity in K12 Inc. (NYSE:LRN)
Heading into the third quarter of 2019, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from one quarter earlier. On the other hand, there were a total of 17 hedge funds with a bullish position in LRN a year ago. So, let’s find out 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 K12 Inc. (NYSE:LRN), which was worth $49.7 million at the end of the second quarter. On the second spot was D E Shaw which amassed $32 million worth of shares. Moreover, Arrowstreet Capital, GLG Partners, and AQR Capital Management were also bullish on K12 Inc. (NYSE:LRN), allocating a large percentage of their portfolios to this stock.
Because K12 Inc. (NYSE:LRN) has faced bearish sentiment from the smart money, it’s easy to see that there is a sect of hedgies that slashed their full holdings last quarter. At the top of the heap, Ken Grossman and Glen Schneider’s SG Capital Management said goodbye to the biggest stake of the 750 funds monitored by Insider Monkey, comprising close to $6.8 million in stock. Josh Goldberg’s fund, G2 Investment Partners Management, also dumped its stock, about $5.3 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 2 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks similar to K12 Inc. (NYSE:LRN). We will take a look at Veracyte Inc (NASDAQ:VCYT), Bright Scholar Education Holdings Limited (NYSE:BEDU), Marcus & Millichap Inc (NYSE:MMI), and Rubius Therapeutics, Inc. (NASDAQ:RUBY). This group of stocks’ market valuations match LRN’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VCYT | 24 | 145196 | 2 |
| BEDU | 9 | 72225 | 0 |
| MMI | 12 | 96656 | 0 |
| RUBY | 5 | 21538 | 0 |
| Average | 12.5 | 83904 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $84 million. That figure was $162 million in LRN’s case. Veracyte Inc (NASDAQ:VCYT) is the most popular stock in this table. On the other hand Rubius Therapeutics, Inc. (NASDAQ:RUBY) is the least popular one with only 5 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. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately LRN wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on LRN were disappointed as the stock returned -13.2% during the third quarter 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey
