Were Hedge Funds Right About Quaker Chemical Corp (KWR) ?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s analyze whether Quaker Chemical Corp (NYSE:KWR) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Quaker Chemical Corp (NYSE:KWR) investors should pay attention to a decrease in hedge fund sentiment in recent months. KWR was in 9 hedge funds’ portfolios at the end of December. There were 19 hedge funds in our database with KWR positions at the end of the previous quarter. Our calculations also showed that KWR isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

Chuck Royce

Chuck Royce of Royce & Associates

Keeping this in mind let’s analyze the new hedge fund action regarding Quaker Chemical Corp (NYSE:KWR).

How are hedge funds trading Quaker Chemical Corp (NYSE:KWR)?

Heading into the first quarter of 2020, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -53% from one quarter earlier. By comparison, 13 hedge funds held shares or bullish call options in KWR a year ago. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Royce & Associates was the largest shareholder of Quaker Chemical Corp (NYSE:KWR), with a stake worth $130.7 million reported as of the end of September. Trailing Royce & Associates was Greenhouse Funds, which amassed a stake valued at $19.3 million. Holocene Advisors, Millennium Management, and Citadel Investment Group 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 Greenhouse Funds allocated the biggest weight to Quaker Chemical Corp (NYSE:KWR), around 3.54% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 1.17 percent of its 13F equity portfolio to KWR.

Due to the fact that Quaker Chemical Corp (NYSE:KWR) has witnessed a decline in interest from the smart money, it’s safe to say that there were a few fund managers who were dropping their entire stakes last quarter. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace LLP said goodbye to the biggest investment of the 750 funds watched by Insider Monkey, totaling an estimated $7.5 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dumped its stock, about $1.4 million worth. These transactions are interesting, as total hedge fund interest fell by 10 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Quaker Chemical Corp (NYSE:KWR). These stocks are AMN Healthcare Services Inc (NYSE:AMN), PotlatchDeltic Corporation (NASDAQ:PCH), Power Integrations Inc (NASDAQ:POWI), and GATX Corporation (NYSE:GATX). This group of stocks’ market valuations are closest to KWR’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMN 10 51628 1
PCH 16 345548 -4
POWI 17 62740 4
GATX 21 227877 5
Average 16 171948 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $172 million. That figure was $156 million in KWR’s case. GATX Corporation (NYSE:GATX) is the most popular stock in this table. On the other hand AMN Healthcare Services Inc (NYSE:AMN) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Quaker Chemical Corp (NYSE:KWR) is even less popular than AMN. Hedge funds dodged a bullet by taking a bearish stance towards KWR. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately KWR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); KWR investors were disappointed as the stock returned -24.5% during the same time period 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 most of these stocks already outperformed the market so far in 2020.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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