The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May and August as this time China pivoted and Trump put more pressure on China by increasing tariffs. Hedge funds’ top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 24.4% through September 30th, vs. a gain of 20.4% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Kadant Inc. (NYSE:KAI), and what that likely means for the prospects of the company and its stock.
Kadant Inc. (NYSE:KAI) investors should be aware of a decrease in enthusiasm from smart money recently. Our calculations also showed that KAI isn’t among the 30 most popular stocks among hedge funds (see the video below).
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’ 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.
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 view the new hedge fund action regarding Kadant Inc. (NYSE:KAI).
How have hedgies been trading Kadant Inc. (NYSE:KAI)?
At the end of the second quarter, a total of 11 of the hedge funds tracked by Insider Monkey were long this stock, a change of -35% from one quarter earlier. On the other hand, there were a total of 14 hedge funds with a bullish position in KAI a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Royce & Associates was the largest shareholder of Kadant Inc. (NYSE:KAI), with a stake worth $55 million reported as of the end of March. Trailing Royce & Associates was Renaissance Technologies, which amassed a stake valued at $6.4 million. Citadel Investment Group, AlphaOne Capital Partners, and Driehaus Capital were also very fond of the stock, giving the stock large weights in their portfolios.
Seeing as Kadant Inc. (NYSE:KAI) has witnessed declining sentiment from hedge fund managers, it’s safe to say that there is a sect of hedge funds who sold off their entire stakes by the end of the second quarter. At the top of the heap, Israel Englander’s Millennium Management dropped the biggest investment of all the hedgies tracked by Insider Monkey, worth close to $11.6 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund cut about $2.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 6 funds by the end of the second quarter.
Let’s also examine hedge fund activity in other stocks similar to Kadant Inc. (NYSE:KAI). We will take a look at Voyager Therapeutics, Inc. (NASDAQ:VYGR), Addus Homecare Corporation (NASDAQ:ADUS), NextPoint Residential Trust Inc (NYSE:NXRT), and Schweitzer-Mauduit International, Inc. (NYSE:SWM). All of these stocks’ market caps are similar to KAI’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $126 million. That figure was $66 million in KAI’s case. Voyager Therapeutics, Inc. (NASDAQ:VYGR) is the most popular stock in this table. On the other hand NextPoint Residential Trust Inc (NYSE:NXRT) is the least popular one with only 10 bullish hedge fund positions. Kadant Inc. (NYSE:KAI) 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. 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. Unfortunately KAI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); KAI investors were disappointed as the stock returned -3.1% during the third 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.