It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Ulta Beauty, Inc. (NASDAQ:ULTA).
Ulta Beauty, Inc. (NASDAQ:ULTA) was in 39 hedge funds' portfolios at the end of September. ULTA shareholders have witnessed a decrease in enthusiasm from smart money recently. There were 44 hedge funds in our database with ULTA holdings at the end of the previous quarter. Our calculations also showed that ULTA 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_339739" align="alignnone" width="600"] Ricky Sandler of Eminence Capital[/caption]
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. Keeping this in mind let's take a peek at the latest hedge fund action regarding Ulta Beauty, Inc. (NASDAQ:ULTA).
What have hedge funds been doing with Ulta Beauty, Inc. (NASDAQ:ULTA)?
At the end of the third quarter, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ULTA 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.
When looking at the institutional investors followed by Insider Monkey, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the biggest position in Ulta Beauty, Inc. (NASDAQ:ULTA). Arrowstreet Capital has a $151 million position in the stock, comprising 0.4% of its 13F portfolio. Sitting at the No. 2 spot is Brandon Haley of Holocene Advisors, with a $115.2 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism comprise Robert Joseph Caruso's Select Equity Group, Ryan Pedlow's Two Creeks Capital Management and Ricky Sandler's Eminence Capital. In terms of the portfolio weights assigned to each position Two Creeks Capital Management allocated the biggest weight to Ulta Beauty, Inc. (NASDAQ:ULTA), around 5.67% of its 13F portfolio. GuardCap Asset Management is also relatively very bullish on the stock, setting aside 4.22 percent of its 13F equity portfolio to ULTA.
Due to the fact that Ulta Beauty, Inc. (NASDAQ:ULTA) has experienced falling interest from the smart money, it's safe to say that there lies a certain "tier" of hedge funds that slashed their entire stakes in the third quarter. It's worth mentioning that Renaissance Technologies dropped the biggest position of the 750 funds monitored by Insider Monkey, comprising an estimated $114.2 million in stock. Phill Gross and Robert Atchinson's fund, Adage Capital Management, also dropped its stock, about $9 million worth. These moves are interesting, as aggregate hedge fund interest fell by 5 funds in the third quarter.
Let's now review hedge fund activity in other stocks similar to Ulta Beauty, Inc. (NASDAQ:ULTA). We will take a look at The Cooper Companies, Inc. (NYSE:COO), Diamondback Energy Inc (NASDAQ:FANG), Symantec Corporation (NASDAQ:SYMC), and CarMax Inc (NYSE:KMX). All of these stocks' market caps resemble ULTA's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position COO,27,741670,-1 FANG,40,1201319,-7 SYMC,38,1527336,3 KMX,41,1886723,2 Average,36.5,1339262,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 36.5 hedge funds with bullish positions and the average amount invested in these stocks was $1339 million. That figure was $900 million in ULTA's case. CarMax Inc (NYSE:KMX) is the most popular stock in this table. On the other hand The Cooper Companies, Inc. (NYSE:COO) is the least popular one with only 27 bullish hedge fund positions. Ulta Beauty, Inc. (NASDAQ:ULTA) 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 ULTA wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ULTA were disappointed as the stock returned 3.3% 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.
Disclosure: None. This article was originally published at Insider Monkey.