KLX Energy Services Holdings, Inc. (KLXE): Hedge Funds Caught Wrong-Footed

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 752 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 September 30th. In this article we look at what those investors think of KLX Energy Services Holdings, Inc. (NASDAQ:KLXE).

KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) was in 13 hedge funds’ portfolios at the end of September. KLXE investors should pay attention to an increase in hedge fund sentiment recently. There were 8 hedge funds in our database with KLXE holdings at the end of the previous quarter. Our calculations also showed that KLXE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.

Chuck Royce

Chuck Royce of Royce & Associates

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s take a look at the new hedge fund action encompassing KLX Energy Services Holdings, Inc. (NASDAQ:KLXE).

What have hedge funds been doing with KLX Energy Services Holdings, Inc. (NASDAQ:KLXE)?

Heading into the fourth quarter of 2019, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of 63% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards KLXE over the last 17 quarters. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

More specifically, GAMCO Investors was the largest shareholder of KLX Energy Services Holdings, Inc. (NASDAQ:KLXE), with a stake worth $4.7 million reported as of the end of September. Trailing GAMCO Investors was Royce & Associates, which amassed a stake valued at $3.8 million. Millennium Management, Proxima Capital Management, and Forest Hill Capital 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 Proxima Capital Management allocated the biggest weight to KLX Energy Services Holdings, Inc. (NASDAQ:KLXE), around 4.26% of its 13F portfolio. Forest Hill Capital is also relatively very bullish on the stock, dishing out 0.71 percent of its 13F equity portfolio to KLXE.

Now, key money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, assembled the most outsized position in KLX Energy Services Holdings, Inc. (NASDAQ:KLXE). Millennium Management had $2.9 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $0.7 million position during the quarter. The following funds were also among the new KLXE investors: Paul Marshall and Ian Wace’s Marshall Wace, Ken Griffin’s Citadel Investment Group, and Donald Sussman’s Paloma Partners.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) but similarly valued. We will take a look at Inovio Pharmaceuticals Inc (NASDAQ:INO), Chemung Financial Corp. (NASDAQ:CHMG), First Bank (NASDAQ:FRBA), and Athersys, Inc. (NASDAQ:ATHX). This group of stocks’ market caps resemble KLXE’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INO 3 775 -2
CHMG 3 10137 -1
FRBA 4 5626 1
ATHX 6 1741 1
Average 4 4570 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 4 hedge funds with bullish positions and the average amount invested in these stocks was $5 million. That figure was $20 million in KLXE’s case. Athersys, Inc. (NASDAQ:ATHX) is the most popular stock in this table. On the other hand Inovio Pharmaceuticals Inc (NASDAQ:INO) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks KLX Energy Services Holdings, Inc. (NASDAQ:KLXE) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately KLXE wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KLXE were disappointed as the stock returned -34.7% during the first two months of the fourth 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 70 percent of these stocks already outperformed the market in Q4.

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