Should You Buy Kadant Inc. (KAI)?

Nina Todic

Updated Thu, Dec 20, 2018, 6:12 PM

At Insider Monkey we follow around 700 of the best-performing investors and even though many of them lost money in the last couple of months (70% of hedge funds lost money in October whereas S&P 500 ETF lost about 7%), the history teaches us that over the long-run they still manage to beat the market, which is why it can be profitable for us to imitate their activity. Of course, even the best money managers can sometimes get it wrong, but following some of their picks gives us a better chance to outperform the crowd than picking a random stock and this is where our research comes in.

Hedge fund interest in Kadant Inc. (NYSE:KAI) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as NovaGold Resources Inc. (NYSEAMEX:NG), TeleTech Holdings, Inc. (NASDAQ:TTEC), and Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) to gather more data points.

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 flagship best performing hedge funds strategy returned 6.3% year to date (through December 3rd) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 18 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

We're going to go over the new hedge fund action surrounding Kadant Inc. (NYSE:KAI).

How are hedge funds trading Kadant Inc. (NYSE:KAI)?

At Q3's end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, no change from the previous quarter. By comparison, 11 hedge funds held shares or bullish call options in KAI heading into this year. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Royce & Associates was the largest shareholder of Kadant Inc. (NYSE:KAI), with a stake worth $52.5 million reported as of the end of September. Trailing Royce & Associates was Renaissance Technologies, which amassed a stake valued at $18.9 million. Driehaus Capital, AQR Capital Management, and AlphaOne Capital Partners were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Kadant Inc. (NYSE:KAI) has faced declining sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedgies who sold off their positions entirely in the third quarter. It's worth mentioning that Peter Algert and Kevin Coldiron's Algert Coldiron Investors dumped the biggest position of the 700 funds tracked by Insider Monkey, valued at an estimated $2.8 million in stock. Dmitry Balyasny's fund, Balyasny Asset Management, also said goodbye to its stock, about $0.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Kadant Inc. (NYSE:KAI) but similarly valued. We will take a look at NovaGold Resources Inc. (NYSE:NG), TTEC Holdings, Inc. (NASDAQ:TTEC), Vanda Pharmaceuticals Inc. (NASDAQ:VNDA), and Viad Corp (NYSE:VVI). This group of stocks' market caps resemble KAI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NG,13,178655,0 TTEC,14,20335,2 VNDA,20,357102,0 VVI,12,186337,0 Average,14.75,185607,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $186 million. That figure was $100 million in KAI's case. Vanda Pharmaceuticals Inc. (NASDAQ:VNDA) is the most popular stock in this table. On the other hand Viad Corp (NYSE:VVI) is the least popular one with only 12 bullish hedge fund positions. Kadant Inc. (NYSE:KAI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. In this regard VNDA might be a better candidate to consider a long position.

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

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