Hedge funds and other investment firms run by legendary investors like Israel Englander and Ray Dalio are entrusted to manage billions of dollars of accredited investors’ money because they are without peer in the resources they use to identify the best investments for their chosen investment horizon. Moreover, they are more willing to invest a greater amount of their resources in small-cap stocks than big brokerage houses, and this is often where they generate their outperformance, which is why we pay particular attention to their best ideas in this space.
KMG Chemicals, Inc. (NYSE:KMG) investors should be aware of an increase in enthusiasm from smart money of late. There were 9 hedge funds in our database with KMG positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as ChannelAdvisor Corp (NYSE:ECOM), Pacific Continental Corporation (NASDAQ:PCBK), and Aratana Therapeutics Inc (NASDAQ:PETX) to gather more data points.
At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.
Keeping this in mind, let’s analyze the key action surrounding KMG Chemicals, Inc. (NYSE:KMG).
What does the smart money think about KMG Chemicals, Inc. (NYSE:KMG)?
Heading into the fourth quarter of 2016, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from the second quarter of 2016. By comparison, 9 hedge funds held shares or bullish call options in KMG heading into this year. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Douglas T. Granat’s Trigran Investments has the most valuable position in KMG Chemicals, Inc. (NYSE:KMG), worth close to $49.2 million, corresponding to 12.9% of its total 13F portfolio. The second largest stake is held by Jim Simons of Renaissance Technologies which is one of the largest hedge funds in the world, with a $8.9 million position. Other peers that hold long positions encompass Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, Israel Englander’s Millennium Management and John Overdeck and David Siegel’s Two Sigma Advisors. We should note that none of these hedge funds are among our list of the 100 best performing hedge funds which is based on the performance of their 13F long positions in non-microcap stocks.
Consequently, some big names have been driving this bullishness. Glenn Russell Dubin of Highbridge Capital Management established the most valuable position in KMG Chemicals, Inc. (NYSE:KMG). Highbridge Capital Management had $0.4 million invested in the company at the end of the quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as KMG Chemicals, Inc. (NYSE:KMG) but similarly valued. These stocks are ChannelAdvisor Corp (NYSE:ECOM), Pacific Continental Corporation (NASDAQ:PCBK), Aratana Therapeutics Inc (NASDAQ:PETX), and United Community Financial Corp (NASDAQ:UCFC). All of these stocks’ market caps are similar to KMG’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $66 million in KMG’s case. Aratana Therapeutics Inc (NASDAQ:PETX) is the most popular stock in this table. On the other hand Pacific Continental Corporation (NASDAQ:PCBK) is the least popular one with only 5 bullish hedge fund positions. KMG Chemicals, Inc. (NYSE:KMG) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard PETX might be a better candidate to consider taking a long position in.