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Is KLA Corporation (KLAC) Going to Burn These Hedge Funds?

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of KLA Corporation (NASDAQ:KLAC) and see how the stock is affected by the recent hedge fund activity.

KLA Corporation (NASDAQ:KLAC) was in 24 hedge funds’ portfolios at the end of the second quarter of 2019. KLAC shareholders have witnessed a decrease in hedge fund sentiment in recent months. There were 41 hedge funds in our database with KLAC positions at the end of the previous quarter. Our calculations also showed that KLAC isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 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.

HIGHBRIDGE CAPITAL MANAGEMENT

Unlike some fund managers who are betting on Dow reaching 40000 in a year, 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. Let’s view the recent hedge fund action surrounding KLA Corporation (NASDAQ:KLAC).

What have hedge funds been doing with KLA Corporation (NASDAQ:KLAC)?

Heading into the third quarter of 2019, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -41% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KLAC over the last 16 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

KLAC_oct2019

Among these funds, Theleme Partners held the most valuable stake in KLA Corporation (NASDAQ:KLAC), which was worth $120.2 million at the end of the second quarter. On the second spot was Alkeon Capital Management which amassed $82.5 million worth of shares. Moreover, Citadel Investment Group, Adage Capital Management, and D E Shaw were also bullish on KLA Corporation (NASDAQ:KLAC), allocating a large percentage of their portfolios to this stock.

Since KLA Corporation (NASDAQ:KLAC) has experienced a decline in interest from the smart money, logic holds that there is a sect of fund managers that elected to cut their entire stakes last quarter. Intriguingly, Renaissance Technologies said goodbye to the biggest investment of all the hedgies followed by Insider Monkey, worth about $96.8 million in stock. John Overdeck and David Siegel’s fund, Two Sigma Advisors, also cut its stock, about $25.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 17 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to KLA Corporation (NASDAQ:KLAC). We will take a look at Splunk Inc (NASDAQ:SPLK), Rockwell Automation Inc. (NYSE:ROK), CGI Inc. (NYSE:GIB), and Best Buy Co., Inc. (NYSE:BBY). This group of stocks’ market caps resemble KLAC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SPLK 25 206778 -4
ROK 31 423135 3
GIB 14 311851 -4
BBY 31 991291 -4
Average 25.25 483264 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $483 million. That figure was $504 million in KLAC’s case. Rockwell Automation Inc. (NYSE:ROK) is the most popular stock in this table. On the other hand CGI Inc. (NYSE:GIB) is the least popular one with only 14 bullish hedge fund positions. KLA Corporation (NASDAQ:KLAC) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on KLAC as the stock returned 35.7% during the same time frame and outperformed the market by an even larger margin.

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

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