Was Smart Money Right About Crowding Into Black Knight, Inc. (BKI)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Black Knight, Inc. (NYSE:BKI) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Black Knight, Inc. (NYSE:BKI) a sound investment today? Hedge funds were in a bullish mood. The number of long hedge fund positions rose by 12 recently. Black Knight, Inc. (NYSE:BKI) was in 44 hedge funds’ portfolios at the end of June. The all time high for this statistics is 45. Our calculations also showed that BKI 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). There were 32 hedge funds in our database with BKI positions at the end of the first quarter.

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 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 S&P 500 ETFs by 58 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 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a look at the latest hedge fund action regarding Black Knight, Inc. (NYSE:BKI).

How have hedgies been trading Black Knight, Inc. (NYSE:BKI)?

At Q2’s end, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 38% from one quarter earlier. On the other hand, there were a total of 45 hedge funds with a bullish position in BKI a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D E Shaw held the most valuable stake in Black Knight, Inc. (NYSE:BKI), which was worth $183.4 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $56.7 million worth of shares. Echo Street Capital Management, Third Point, and Wallace R. Weitz & Co. 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 Banbury Partners allocated the biggest weight to Black Knight, Inc. (NYSE:BKI), around 7.79% of its 13F portfolio. Aravt Global is also relatively very bullish on the stock, designating 6.55 percent of its 13F equity portfolio to BKI.

As aggregate interest increased, some big names have jumped into Black Knight, Inc. (NYSE:BKI) headfirst. Citadel Investment Group, managed by Ken Griffin, initiated the most outsized position in Black Knight, Inc. (NYSE:BKI). Citadel Investment Group had $56.7 million invested in the company at the end of the quarter. Dan Loeb’s Third Point also made a $32.3 million investment in the stock during the quarter. The other funds with brand new BKI positions are Paul Marshall and Ian Wace’s Marshall Wace LLP, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Brandon Haley’s Holocene Advisors.

Let’s check out hedge fund activity in other stocks similar to Black Knight, Inc. (NYSE:BKI). These stocks are Halliburton Company (NYSE:HAL), Equity Lifestyle Properties, Inc. (NYSE:ELS), Principal Financial Group Inc (NASDAQ:PFG), Neurocrine Biosciences, Inc. (NASDAQ:NBIX), Waters Corporation (NYSE:WAT), Varian Medical Systems, Inc. (NYSE:VAR), and Ubiquiti Inc. (NYSE:UI). This group of stocks’ market caps are similar to BKI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $568 million. That figure was $596 million in BKI’s case. Neurocrine Biosciences, Inc. (NASDAQ:NBIX) is the most popular stock in this table. On the other hand Varian Medical Systems, Inc. (NYSE:VAR) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Black Knight, Inc. (NYSE:BKI) is more popular among hedge funds. Our overall hedge fund sentiment score for BKI is 89.3. 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 returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on BKI as the stock returned 28.6% since the end of June (through 10/23) 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.