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2019 Review: Top Hedge Fund Stocks vs. Ralph Lauren Corporation (RL)

Asma UL Husna

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Ralph Lauren Corporation (NYSE:RL).

Ralph Lauren Corporation (NYSE:RL) was in 31 hedge funds' portfolios at the end of the third quarter of 2019. RL investors should be aware of a decrease in hedge fund interest recently. There were 35 hedge funds in our database with RL holdings at the end of the previous quarter. Our calculations also showed that RL isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_26397" align="aligncenter" width="473"] Ray Dalio of Bridgewater Associates[/caption]

BRIDGEWATER ASSOCIATES

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now we're going to take a look at the key hedge fund action surrounding Ralph Lauren Corporation (NYSE:RL).

Hedge fund activity in Ralph Lauren Corporation (NYSE:RL)

Heading into the fourth quarter of 2019, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RL over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Renaissance Technologies has the number one position in Ralph Lauren Corporation (NYSE:RL), worth close to $396 million, amounting to 0.3% of its total 13F portfolio. The second most bullish fund manager is AQR Capital Management, managed by Cliff Asness, which holds a $137.1 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions encompass Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Israel Englander's Millennium Management and Ray Dalio's Bridgewater Associates. In terms of the portfolio weights assigned to each position Armistice Capital allocated the biggest weight to Ralph Lauren Corporation (NYSE:RL), around 1.47% of its 13F portfolio. Atlantic Investment Management is also relatively very bullish on the stock, designating 0.44 percent of its 13F equity portfolio to RL.

Seeing as Ralph Lauren Corporation (NYSE:RL) has faced a decline in interest from the smart money, logic holds that there were a few money managers that slashed their positions entirely last quarter. Intriguingly, Robert Pohly's Samlyn Capital dropped the largest position of the "upper crust" of funds tracked by Insider Monkey, valued at about $13.7 million in stock. Alexander Mitchell's fund, Scopus Asset Management, also cut its stock, about $13.2 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds last quarter.

Let's go over hedge fund activity in other stocks similar to Ralph Lauren Corporation (NYSE:RL). These stocks are Cabot Oil & Gas Corporation (NYSE:COG), NovoCure Limited (NASDAQ:NVCR), 58.com Inc (NYSE:WUBA), and Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM). This group of stocks' market valuations resemble RL's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COG,38,667348,1 NVCR,22,375699,0 WUBA,24,331607,2 SQM,8,19977,1 Average,23,348658,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $349 million. That figure was $843 million in RL's case. Cabot Oil & Gas Corporation (NYSE:COG) is the most popular stock in this table. On the other hand Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) is the least popular one with only 8 bullish hedge fund positions. Ralph Lauren Corporation (NYSE:RL) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately RL wasn't nearly as popular as these 20 stocks and hedge funds that were betting on RL were disappointed as the stock returned 16% in 2019 (through December 23rd) 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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