Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% 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 is wise to check hedge fund activity before you invest your time or your savings on a stock like Fortune Brands Home & Security Inc (NYSE:FBHS).
Is Fortune Brands Home & Security Inc (NYSE:FBHS) worth your attention right now? Investors who are in the know are getting more bullish. The number of long hedge fund positions increased by 2 in recent months. Our calculations also showed that FBHS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_25717" align="aligncenter" width="548"] Steven Cohen of Point72 Asset Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a look at the latest hedge fund action regarding Fortune Brands Home & Security Inc (NYSE:FBHS).
How are hedge funds trading Fortune Brands Home & Security Inc (NYSE:FBHS)?
At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards FBHS over the last 17 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Fortune Brands Home & Security Inc (NYSE:FBHS) was held by Holocene Advisors, which reported holding $100.2 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $65 million position. Other investors bullish on the company included Point72 Asset Management, Adage Capital Management, and GAMCO Investors. In terms of the portfolio weights assigned to each position Lodge Hill Capital allocated the biggest weight to Fortune Brands Home & Security Inc (NYSE:FBHS), around 6.54% of its portfolio. BeaconLight Capital is also relatively very bullish on the stock, earmarking 5.81 percent of its 13F equity portfolio to FBHS.
As one would reasonably expect, some big names were leading the bulls' herd. Balyasny Asset Management, managed by Dmitry Balyasny, created the most valuable position in Fortune Brands Home & Security Inc (NYSE:FBHS). Balyasny Asset Management had $28.2 million invested in the company at the end of the quarter. Clint Carlson's Carlson Capital also initiated a $18.3 million position during the quarter. The following funds were also among the new FBHS investors: Ray Dalio's Bridgewater Associates, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, and Matthew Tewksbury's Stevens Capital Management.
Let's now take a look at hedge fund activity in other stocks similar to Fortune Brands Home & Security Inc (NYSE:FBHS). We will take a look at AMERCO (NASDAQ:UHAL), Bausch Health Companies (NYSE:BHC), Voya Financial Inc (NYSE:VOYA), and Liberty Property Trust (NYSE:LPT). This group of stocks' market caps match FBHS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UHAL,10,400813,-5 BHC,32,1808152,1 VOYA,37,1076870,-6 LPT,29,576112,10 Average,27,965487,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $965 million. That figure was $556 million in FBHS's case. Voya Financial Inc (NYSE:VOYA) is the most popular stock in this table. On the other hand AMERCO (NASDAQ:UHAL) is the least popular one with only 10 bullish hedge fund positions. Fortune Brands Home & Security Inc (NYSE:FBHS) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on FBHS as the stock returned 16% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.