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Knowles Corporation (KN): Are Hedge Funds Right About This Stock?

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on Knowles Corporation (NYSE:KN) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Is Knowles Corporation (NYSE:KN) a healthy stock for your portfolio? The smart money is getting more optimistic. The number of bullish hedge fund bets rose by 5 in recent months. Our calculations also showed that KN 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Parag Vora - HG Vora Capital

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. We’re going to take a glance at the recent hedge fund action regarding Knowles Corporation (NYSE:KN).

Hedge fund activity in Knowles Corporation (NYSE:KN)

At the end of the second quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 29% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards KN over the last 16 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with KN Positions

More specifically, Falcon Edge Capital was the largest shareholder of Knowles Corporation (NYSE:KN), with a stake worth $81.9 million reported as of the end of March. Trailing Falcon Edge Capital was Ariel Investments, which amassed a stake valued at $73.3 million. D E Shaw, Millennium Management, and HG Vora Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Consequently, key money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, initiated the biggest position in Knowles Corporation (NYSE:KN). Millennium Management had $18.7 million invested in the company at the end of the quarter. Philip Hempleman’s Ardsley Partners also initiated a $6.5 million position during the quarter. The other funds with brand new KN positions are Matthew Hulsizer’s PEAK6 Capital Management, Mark Broach’s Manatuck Hill Partners, and Adam Usdan’s Trellus Management Company.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Knowles Corporation (NYSE:KN) but similarly valued. These stocks are Walker & Dunlop Inc. (NYSE:WD), Upwork Inc. (NASDAQ:UPWK), Prestige Consumer Healthcare Inc. (NYSE:PBH), and Silicon Motion Technology Corporation (NASDAQ:SIMO). This group of stocks’ market valuations match KN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WD 15 64830 1
UPWK 10 50349 1
PBH 15 66050 2
SIMO 12 141488 -1
Average 13 80679 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $81 million. That figure was $265 million in KN’s case. Walker & Dunlop Inc. (NYSE:WD) is the most popular stock in this table. On the other hand Upwork Inc. (NASDAQ:UPWK) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Knowles Corporation (NYSE:KN) is more popular among hedge funds. 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. Hedge funds were also right about betting on KN as the stock returned 11.1% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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