Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 of 2018 due to various reasons. Nevertheless, the data show elite investors' consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETFs by nearly 10 percentage points during the first 11 months of 2019. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at Ulta Beauty, Inc. (NASDAQ:ULTA) from the perspective of those elite funds.
Ulta Beauty, Inc. (NASDAQ:ULTA) was in 39 hedge funds' portfolios at the end of the third quarter of 2019. ULTA investors should be aware of a decrease in hedge fund sentiment lately. There were 44 hedge funds in our database with ULTA positions 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 below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_339739" align="aligncenter" width="600"] Ricky Sandler of Eminence Capital[/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. Let's take a gander at the fresh hedge fund action encompassing Ulta Beauty, Inc. (NASDAQ:ULTA).
Hedge fund activity in 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 previous quarter. The graph below displays the number of hedge funds with bullish position in ULTA over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
The largest stake in Ulta Beauty, Inc. (NASDAQ:ULTA) was held by Arrowstreet Capital, which reported holding $151 million worth of stock at the end of September. It was followed by Holocene Advisors with a $115.2 million position. Other investors bullish on the company included Select Equity Group, Two Creeks Capital Management, and 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 portfolio. GuardCap Asset Management is also relatively very bullish on the stock, dishing out 4.22 percent of its 13F equity portfolio to ULTA.
Seeing as 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 fund managers that elected to cut their full holdings last quarter. It's worth mentioning that Renaissance Technologies cut the biggest position of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $114.2 million in stock. Phill Gross and Robert Atchinson's fund, Adage Capital Management, also cut its stock, about $9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 5 funds last quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Ulta Beauty, Inc. (NASDAQ:ULTA) but similarly valued. These stocks are The Cooper Companies, Inc. (NYSE:COO), Diamondback Energy Inc (NASDAQ:FANG), NortonLifeLock Inc. (NASDAQ:SYMC), and CarMax Inc (NYSE:KMX). All of these stocks' market caps are closest to 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 -6.7% during the fourth quarter (through the end of November) 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.
Disclosure: None. This article was originally published at Insider Monkey.