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Is K12 Inc. (LRN) Going to Burn These Hedge Funds?

It was a rough fourth quarter for many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 7% during October and average hedge fund losing about 3%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by about 4 percentage points during the first half of Q4, as investors fled less-known quantities for safe havens. This was the case with hedge funds, who we heard were pulling money from the market amid the volatility, which included money from small-cap stocks, which they invest in at a higher rate than other investors. This action contributed to the greater decline in these stocks during the tumultuous period. We will study how this market volatility affected their sentiment towards K12 Inc. (NYSE:LRN) during the quarter below.

Is K12 Inc. (NYSE:LRN) a buy here? The best stock pickers are getting more optimistic. The number of bullish hedge fund positions inched up by 2 recently. Our calculations also showed that LRN isn’t among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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.

D. E. Shaw

We’re going to take a gander at the key hedge fund action regarding K12 Inc. (NYSE:LRN).

How have hedgies been trading K12 Inc. (NYSE:LRN)?

At the end of the third quarter, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from one quarter earlier. By comparison, 12 hedge funds held shares or bullish call options in LRN heading into this year. With hedge funds’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

LRN_dec2018

Among these funds, Renaissance Technologies held the most valuable stake in K12 Inc. (NYSE:LRN), which was worth $27.8 million at the end of the third quarter. On the second spot was GLG Partners which amassed $19.6 million worth of shares. Moreover, D E Shaw, Royce & Associates, and AQR Capital Management were also bullish on K12 Inc. (NYSE:LRN), allocating a large percentage of their portfolios to this stock.

Now, some big names were breaking ground themselves. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, initiated the most outsized position in K12 Inc. (NYSE:LRN). Marshall Wace LLP had $0.4 million invested in the company at the end of the quarter.

Let’s go over hedge fund activity in other stocks similar to K12 Inc. (NYSE:LRN). These stocks are Oaktree Specialty Lending Corporation (NASDAQ:OCSL), Fortuna Silver Mines Inc. (NYSE:FSM), Civeo Corporation (NYSE:CVEO), and DXP Enterprises Inc (NASDAQ:DXPE). This group of stocks’ market values resemble LRN’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
OCSL 14 64364 1
FSM 11 31756 1
CVEO 12 260239 0
DXPE 12 55449 2
Average 12.25 102952 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $103 million. That figure was $112 million in LRN’s case. Oaktree Specialty Lending Corporation (NASDAQ:OCSL) is the most popular stock in this table. On the other hand Fortuna Silver Mines Inc. (NYSE:FSM) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks K12 Inc. (NYSE:LRN) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

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

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