Were Hedge Funds Right About Dumping Korn Ferry (KFY)?
In this article we will check out the progression of hedge fund sentiment towards Korn Ferry (NYSE:KFY) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Is Korn Ferry (NYSE:KFY) an attractive investment now? Hedge funds were in a pessimistic mood. The number of bullish hedge fund positions dropped by 1 in recent months. Korn Ferry (NYSE:KFY) was in 16 hedge funds' portfolios at the end of March. The all time high for this statistic is 28. Our calculations also showed that KFY isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 17 hedge funds in our database with KFY holdings at the end of December.
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 115 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.
Sahm Adrangi of Kerrisdale Capital
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. With all of this in mind we're going to view the new hedge fund action surrounding Korn Ferry (NYSE:KFY).
Do Hedge Funds Think KFY Is A Good Stock To Buy Now?
At the end of the first quarter, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the fourth quarter of 2020. The graph below displays the number of hedge funds with bullish position in KFY over the last 23 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
More specifically, Paradice Investment Management was the largest shareholder of Korn Ferry (NYSE:KFY), with a stake worth $65.1 million reported as of the end of March. Trailing Paradice Investment Management was Ariel Investments, which amassed a stake valued at $52.1 million. Royce & Associates, Lakewood Capital Management, and Kerrisdale Capital 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 Paradice Investment Management allocated the biggest weight to Korn Ferry (NYSE:KFY), around 3.13% of its 13F portfolio. Lakewood Capital Management is also relatively very bullish on the stock, setting aside 1.58 percent of its 13F equity portfolio to KFY.
Due to the fact that Korn Ferry (NYSE:KFY) has experienced a decline in interest from the entirety of the hedge funds we track, it's easy to see that there is a sect of funds who were dropping their full holdings by the end of the first quarter. Interestingly, Martin Whitman's Third Avenue Management cut the largest position of the 750 funds tracked by Insider Monkey, comprising close to $15.6 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dropped its stock, about $11.1 million worth. These transactions are interesting, as total hedge fund interest dropped by 1 funds by the end of the first quarter.
Let's go over hedge fund activity in other stocks similar to Korn Ferry (NYSE:KFY). These stocks are Atlas Corp. (NYSE:ATCO), NuVasive, Inc. (NASDAQ:NUVA), Kratos Defense & Security Solutions, Inc (NASDAQ:KTOS), Revolution Medicines, Inc. (NASDAQ:RVMD), Mercury General Corporation (NYSE:MCY), Proto Labs Inc (NYSE:PRLB), and Atkore Inc. (NYSE:ATKR). This group of stocks' market valuations are similar to KFY's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATCO,12,1424585,-6 NUVA,20,272025,-5 KTOS,16,194053,-2 RVMD,26,643312,0 MCY,20,178505,2 PRLB,18,515493,2 ATKR,21,174415,-1 Average,19,486055,-1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $486 million. That figure was $227 million in KFY's case. Revolution Medicines, Inc. (NASDAQ:RVMD) is the most popular stock in this table. On the other hand Atlas Corp. (NYSE:ATCO) is the least popular one with only 12 bullish hedge fund positions. Korn Ferry (NYSE:KFY) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for KFY is 35.4. 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. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately KFY wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); KFY investors were disappointed as the stock returned 6.1% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2021.
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Disclosure: None. This article was originally published at Insider Monkey.
