Kennametal Stock Is Up 50%. Here's What a $181 Million Fund Sale Could Mean

Brandes Investment Partners sold 4,965,772 Kennametal shares in Q1, an estimated $180.99 million transaction, but still held 5,265,280 shares worth $190.23 million after the sale. The article frames the move as portfolio rebalancing rather than a bearish fundamental call, noting Kennametal shares are up about 50% over the past year and the company recently posted a strong quarter with revenue up 22% year over year to $593 million and adjusted EPS up 65% to $0.77. Management also raised full-year guidance and added $700 million of liquidity, though working-capital pressure from higher tungsten prices remains a watch item.

Analysis

KMT is less a clean fundamental re-rating story than a late-cycle beneficiary of a supply shock layered on cyclical recovery. The key second-order effect is that tungsten inflation can keep reported revenue and margins elevated even if end-market volumes flatten, but it also turns working capital into a hidden tax on free cash flow. That makes the stock more fragile than the earnings beat suggests: when commodity normalization arrives, the earnings power can mean-revert faster than the market is currently discounting.

Brandes’ reduction looks consistent with a discipline shift after a sharp run, not necessarily a negative view on the next quarter. The more interesting signal is that a large value investor is trimming into strength while the company is funding liquidity expansion and terming out debt, which tells you the bull case is increasingly dependent on continued commodity support rather than just operating leverage. In that setup, upside is now more tied to tungsten price duration than to incremental manufacturing improvement.

The consensus appears to be underestimating how quickly the narrative can flip if tungsten prices soften or if restocking pauses. Over the next 1-3 months, the risk is not an earnings miss but a free-cash-flow disappointment and multiple compression as investors focus on balance-sheet usage. Over 6-12 months, if pricing normalizes, KMT likely trades more like a cyclical industrial than a special situation, which would remove the premium implied by the recent momentum.

Relative winners include upstream tungsten-linked suppliers, while end-users in aerospace, general engineering, and machining may see some pass-through pressure with a lag. The market is currently rewarding KMT for pricing power, but the same pricing power can destroy demand elasticity and invite substitution or inventory destocking. That creates a classic squeeze: near-term margin expansion, medium-term volume risk.

Key Decisions for Investors

• Short KMT on a 1-3 month horizon or buy put spreads into strength; thesis is free-cash-flow disappointment and multiple compression if tungsten prices stabilize or roll over.
• Pair trade: long higher-quality industrial compounders vs short KMT over 3-6 months; KMT has more commodity beta and working-capital sensitivity, while peers with less raw-material exposure should hold margins better.
• If already long KMT, trim 25-50% after the recent run and re-enter only on evidence of tungsten price persistence or another guide raise; risk/reward has shifted from asymmetric upside to event-driven downside.
• Use a trailing stop rather than a hard thesis stop on KMT longs; the stock is now momentum-supported, but that support can reverse quickly if the next quarter shows inventory or liquidity stress.
• For a more tactical setup, consider selling covered calls 1-2 expiries out against existing KMT holdings; implied upside now looks capped relative to the probability of commodity normalization.