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Were Hedge Funds Right About Piling Into KKR & Co Inc. (KKR)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of KKR & Co Inc. (NYSE:KKR) based on that data and determine whether they were really smart about the stock.

KKR & Co Inc. (NYSE:KKR) shareholders have witnessed a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that KKR 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.

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.

Jeffrey Altman Owl Creek

Jeffrey Altman of Owl Creek Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the recent hedge fund action encompassing KKR & Co Inc. (NYSE:KKR).

How are hedge funds trading KKR & Co Inc. (NYSE:KKR)?

Heading into the second quarter of 2020, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of -14% from one quarter earlier. By comparison, 30 hedge funds held shares or bullish call options in KKR a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is KKR A Good Stock To Buy?

The largest stake in KKR & Co Inc. (NYSE:KKR) was held by ValueAct Capital, which reported holding $1056.2 million worth of stock at the end of September. It was followed by Akre Capital Management with a $333 million position. Other investors bullish on the company included Diamond Hill Capital, Alkeon Capital Management, and Pzena Investment Management. In terms of the portfolio weights assigned to each position Blacksheep Fund Management allocated the biggest weight to KKR & Co Inc. (NYSE:KKR), around 27.08% of its 13F portfolio. OCO Capital Partners is also relatively very bullish on the stock, setting aside 22.98 percent of its 13F equity portfolio to KKR.

Due to the fact that KKR & Co Inc. (NYSE:KKR) has experienced bearish sentiment from hedge fund managers, logic holds that there is a sect of hedge funds that slashed their full holdings last quarter. It’s worth mentioning that James Parsons’s Junto Capital Management dropped the biggest stake of all the hedgies monitored by Insider Monkey, comprising about $100.2 million in stock, and Michael Blitzer’s Kingstown Capital Management was right behind this move, as the fund dropped about $36.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 8 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to KKR & Co Inc. (NYSE:KKR). These stocks are Edison International (NYSE:EIX), Seattle Genetics, Inc. (NASDAQ:SGEN), AutoZone, Inc. (NYSE:AZO), and PPG Industries, Inc. (NYSE:PPG). This group of stocks’ market caps are similar to KKR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EIX 29 1046389 -5
SGEN 27 6153689 -9
AZO 45 1355325 5
PPG 35 393229 0
Average 34 2237158 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $2237 million. That figure was $2694 million in KKR’s case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Seattle Genetics, Inc. (NASDAQ:SGEN) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks KKR & Co Inc. (NYSE:KKR) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on KKR as the stock returned 32.3% in Q2 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.

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