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Were Hedge Funds Right About Dumping Knowles Corp (KN)?

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 821 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 March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Knowles Corp (NYSE:KN) and determine whether the smart money was really smart about this stock.

Knowles Corp (NYSE:KN) has seen a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that KN isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s view the fresh hedge fund action encompassing Knowles Corp (NYSE:KN).

Hedge fund activity in Knowles Corp (NYSE:KN)

At the end of the first quarter, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -31% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KN over the last 18 quarters. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

Is KN A Good Stock To Buy?

Among these funds, Ariel Investments held the most valuable stake in Knowles Corp (NYSE:KN), which was worth $59.4 million at the end of the third quarter. On the second spot was Falcon Edge Capital which amassed $58.4 million worth of shares. Fisher Asset Management, D E Shaw, and Millennium Management 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 Falcon Edge Capital allocated the biggest weight to Knowles Corp (NYSE:KN), around 6.39% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, dishing out 1.04 percent of its 13F equity portfolio to KN.

Since Knowles Corp (NYSE:KN) has faced falling interest from the entirety of the hedge funds we track, we can see that there lies a certain “tier” of hedgies that decided to sell off their full holdings last quarter. It’s worth mentioning that Mark Coe’s Intrinsic Edge Capital cut the largest stake of the 750 funds followed by Insider Monkey, valued at about $8.6 million in stock. Richard Driehaus’s fund, Driehaus Capital, also said goodbye to its stock, about $6.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 9 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Knowles Corp (NYSE:KN) but similarly valued. These stocks are Northwest Bancshares, Inc. (NASDAQ:NWBI), Cardiovascular Systems Inc (NASDAQ:CSII), USANA Health Sciences, Inc. (NYSE:USNA), and Amerisafe, Inc. (NASDAQ:AMSF). All of these stocks’ market caps match KN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NWBI 14 20443 -5
CSII 12 86525 -4
USNA 13 133207 1
AMSF 9 35964 -1
Average 12 69035 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $206 million in KN’s case. Northwest Bancshares, Inc. (NASDAQ:NWBI) is the most popular stock in this table. On the other hand Amerisafe, Inc. (NASDAQ:AMSF) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Knowles Corp (NYSE:KN) is more popular among hedge funds. 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 gained 18.6% in 2020 through July 27th and still beat the market by 17.1 percentage points. Unfortunately KN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KN were disappointed as the stock returned 9.9% since the end of the first 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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