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KKR & Co Inc. (KKR) Is Falling Out Of Favor With Hedge Funds

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 KKR & Co Inc. (NYSE:KKR) and determine whether hedge funds had an edge regarding this stock.

KKR & Co Inc. (NYSE:KKR) was in 45 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 56. KKR investors should pay attention to a decrease in enthusiasm from smart money in recent months. There were 48 hedge funds in our database with KKR positions at the end of the first quarter. Our calculations also showed that KKR 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.

Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we’re going to analyze the fresh hedge fund action encompassing KKR & Co Inc. (NYSE:KKR).

How are hedge funds trading KKR & Co Inc. (NYSE:KKR)?

At the end of the second quarter, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the first quarter of 2020. By comparison, 36 hedge funds held shares or bullish call options in KKR a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Jeffrey Ubben’s ValueAct Capital has the most valuable position in KKR & Co Inc. (NYSE:KKR), worth close to $1.3896 billion, comprising 15.9% of its total 13F portfolio. The second largest stake is held by Charles Akre of Akre Capital Management, with a $454.6 million position; 3.4% of its 13F portfolio is allocated to the stock. Other professional money managers with similar optimism include Ric Dillon’s Diamond Hill Capital, John Armitage’s Egerton Capital Limited and John W. Rogers’s Ariel Investments. In terms of the portfolio weights assigned to each position Blacksheep Fund Management allocated the biggest weight to KKR & Co Inc. (NYSE:KKR), around 26.23% of its 13F portfolio. ValueAct Capital is also relatively very bullish on the stock, setting aside 15.91 percent of its 13F equity portfolio to KKR.

Judging by the fact that KKR & Co Inc. (NYSE:KKR) has faced declining sentiment from the smart money, logic holds that there is a sect of hedge funds that elected to cut their entire stakes heading into Q3. Intriguingly, Jeffrey Altman’s Owl Creek Asset Management dumped the largest stake of all the hedgies monitored by Insider Monkey, comprising about $22.9 million in stock, and Eric Schneider’s OCO Capital Partners was right behind this move, as the fund dumped about $18.8 million worth. These transactions are important to note, as total hedge fund interest dropped by 3 funds heading into Q3.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as KKR & Co Inc. (NYSE:KKR) but similarly valued. These stocks are Datadog, Inc. (NASDAQ:DDOG), Hormel Foods Corporation (NYSE:HRL), PACCAR Inc (NASDAQ:PCAR), AFLAC Incorporated (NYSE:AFL), Suncor Energy Inc. (NYSE:SU), Sirius XM Holdings Inc (NASDAQ:SIRI), and Cummins Inc. (NYSE:CMI). This group of stocks’ market caps resemble KKR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DDOG 57 2363237 13
HRL 27 440889 -1
PCAR 30 244385 -8
AFL 34 588093 2
SU 29 845050 -1
SIRI 42 1136784 6
CMI 38 358670 4
Average 36.7 853873 2.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.7 hedge funds with bullish positions and the average amount invested in these stocks was $854 million. That figure was $3340 million in KKR’s case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand Hormel Foods Corporation (NYSE:HRL) is the least popular one with only 27 bullish hedge fund positions. KKR & Co Inc. (NYSE:KKR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KKR is 56.1. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on KKR, though not to the same extent, as the stock returned 16.4% since the end of June and outperformed the market as well.

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