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Did Hedge Funds Drop The Ball On D.R. Horton, Inc. (DHI)?

Nina Todic

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first quarter. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards D.R. Horton, Inc. (NYSE:DHI) to find out whether it was one of their high conviction long-term ideas.

D.R. Horton, Inc. (NYSE:DHI) was in 46 hedge funds' portfolios at the end of March. DHI investors should pay attention to a decrease in hedge fund interest in recent months. There were 47 hedge funds in our database with DHI holdings at the end of the previous quarter. Our calculations also showed that dhi isn't among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Ricky Sandler

Let's review the latest hedge fund action surrounding D.R. Horton, Inc. (NYSE:DHI).

How have hedgies been trading D.R. Horton, Inc. (NYSE:DHI)?

At Q1's end, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -2% from the fourth quarter of 2018. By comparison, 44 hedge funds held shares or bullish call options in DHI a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with DHI Positions

More specifically, Long Pond Capital was the largest shareholder of D.R. Horton, Inc. (NYSE:DHI), with a stake worth $510.6 million reported as of the end of March. Trailing Long Pond Capital was D1 Capital Partners, which amassed a stake valued at $486 million. Greenhaven Associates, Lone Pine Capital, and Eminence Capital were also very fond of the stock, giving the stock large weights in their portfolios.

Because D.R. Horton, Inc. (NYSE:DHI) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of funds that slashed their positions entirely heading into Q3. Interestingly, Jim Simons's Renaissance Technologies dropped the biggest stake of all the hedgies monitored by Insider Monkey, totaling about $61.5 million in stock, and Anthony Bozza's Lakewood Capital Management was right behind this move, as the fund said goodbye to about $35.6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds heading into Q3.

Let's also examine hedge fund activity in other stocks similar to D.R. Horton, Inc. (NYSE:DHI). These stocks are CenterPoint Energy, Inc. (NYSE:CNP), ANSYS, Inc. (NASDAQ:ANSS), Brookfield Property REIT Inc. (NASDAQ:BPR), and Ryanair Holdings plc (NASDAQ:RYAAY). This group of stocks' market caps are closest to DHI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CNP,34,939440,1 ANSS,28,837871,-1 BPR,15,85268,1 RYAAY,18,429319,9 Average,23.75,572975,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $573 million. That figure was $2450 million in DHI's case. CenterPoint Energy, Inc. (NYSE:CNP) is the most popular stock in this table. On the other hand Brookfield Property REIT Inc. (NASDAQ:BPR) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks D.R. Horton, Inc. (NYSE:DHI) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on DHI as the stock returned 6.6% during the same period and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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