At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Mohawk Industries, Inc. (NYSE:MHK) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Is Mohawk Industries, Inc. (NYSE:MHK) undervalued? Hedge funds were selling. The number of bullish hedge fund positions went down by 4 in recent months. Mohawk Industries, Inc. (NYSE:MHK) was in 32 hedge funds' portfolios at the end of June. The all time high for this statistics is 64. Our calculations also showed that MHK isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Israel Englander of Millennium Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we're going to take a gander at the key hedge fund action encompassing Mohawk Industries, Inc. (NYSE:MHK).
What does smart money think about Mohawk Industries, Inc. (NYSE:MHK)?
At the end of the second quarter, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the first quarter of 2020. By comparison, 33 hedge funds held shares or bullish call options in MHK a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Pzena Investment Management held the most valuable stake in Mohawk Industries, Inc. (NYSE:MHK), which was worth $201.2 million at the end of the third quarter. On the second spot was Ariel Investments which amassed $81.3 million worth of shares. Greenhaven Associates, FPR Partners, and Select Equity Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position MD Sass allocated the biggest weight to Mohawk Industries, Inc. (NYSE:MHK), around 3.63% of its 13F portfolio. FPR Partners is also relatively very bullish on the stock, designating 2.31 percent of its 13F equity portfolio to MHK.
Seeing as Mohawk Industries, Inc. (NYSE:MHK) has faced bearish sentiment from hedge fund managers, we can see that there lies a certain "tier" of hedgies that elected to cut their positions entirely by the end of the second quarter. At the top of the heap, Boykin Curry's Eagle Capital Management dropped the largest position of the "upper crust" of funds watched by Insider Monkey, worth close to $126.2 million in stock, and Andrew Kurita's Kettle Hill Capital Management was right behind this move, as the fund dropped about $4.6 million worth. These moves are interesting, as aggregate hedge fund interest fell by 4 funds by the end of the second quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Mohawk Industries, Inc. (NYSE:MHK) but similarly valued. These stocks are AGNC Investment Corp. (NASDAQ:AGNC), AptarGroup, Inc. (NYSE:ATR), Companhia de Saneamento Basico (NYSE:SBS), WEX Inc (NYSE:WEX), Five9 Inc (NASDAQ:FIVN), Chemed Corporation (NYSE:CHE), and Albertsons Companies, Inc. (NYSE:ACI). All of these stocks' market caps are closest to MHK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AGNC,37,458061,10 ATR,26,210604,6 SBS,10,270233,2 WEX,24,399174,-11 FIVN,44,1130157,11 CHE,26,351128,1 ACI,30,2773996,30 Average,28.1,799050,7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.1 hedge funds with bullish positions and the average amount invested in these stocks was $799 million. That figure was $693 million in MHK's case. Five9 Inc (NASDAQ:FIVN) is the most popular stock in this table. On the other hand Companhia de Saneamento Basico (NYSE:SBS) is the least popular one with only 10 bullish hedge fund positions. Mohawk Industries, Inc. (NYSE:MHK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MHK is 48.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23.8% in 2020 through September 14th and beat the market by 17.6 percentage points. Unfortunately MHK wasn't nearly as popular as these 10 stocks and hedge funds that were betting on MHK were disappointed as the stock returned -1.3% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.