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These Hedge Funds Cashed Out Of NIKE, Inc. (NKE) Too Soon

Reymerlyn Martin

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding NIKE, Inc. (NYSE:NKE) and determine whether hedge funds had an edge regarding this stock.

Is NIKE, Inc. (NYSE:NKE) going to take off soon? Investors who are in the know were in a pessimistic mood. The number of long hedge fund bets dropped by 9 recently. Our calculations also showed that NKE 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).NIKE, Inc. (NYSE:NKE) was in 71 hedge funds' portfolios at the end of June. The all time high for this statistics is 81. There were 80 hedge funds in our database with NKE holdings at the end of March. Video: 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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.

Dan Loeb THIRD POINT
Dan Loeb THIRD POINT

Dan Loeb of Third Point

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind let's review the latest hedge fund action encompassing NIKE, Inc. (NYSE:NKE).

How have hedgies been trading NIKE, Inc. (NYSE:NKE)?

At the end of the second quarter, a total of 71 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -11% from the first quarter of 2020. On the other hand, there were a total of 51 hedge funds with a bullish position in NKE 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.

Among these funds, Fisher Asset Management held the most valuable stake in NIKE, Inc. (NYSE:NKE), which was worth $633 million at the end of the third quarter. On the second spot was Ako Capital which amassed $174.7 million worth of shares. GuardCap Asset Management, Arrowstreet Capital, and AQR Capital Management 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 Immersion Capital allocated the biggest weight to NIKE, Inc. (NYSE:NKE), around 8.12% of its 13F portfolio. Broad Peak Investment Holdings is also relatively very bullish on the stock, setting aside 8 percent of its 13F equity portfolio to NKE.

Seeing as NIKE, Inc. (NYSE:NKE) has faced a decline in interest from the entirety of the hedge funds we track, it's safe to say that there were a few fund managers that elected to cut their entire stakes by the end of the second quarter. It's worth mentioning that Daniel Sundheim's D1 Capital Partners cut the largest position of the "upper crust" of funds monitored by Insider Monkey, worth about $83.5 million in stock. Andrew Immerman and Jeremy Schiffman's fund, Palestra Capital Management, also cut its stock, about $48 million worth. These moves are interesting, as total hedge fund interest fell by 9 funds by the end of the second quarter.

Let's now review hedge fund activity in other stocks similar to NIKE, Inc. (NYSE:NKE). We will take a look at The Unilever Group (NYSE:UL), Thermo Fisher Scientific Inc. (NYSE:TMO), AstraZeneca plc (NYSE:AZN), Amgen, Inc. (NASDAQ:AMGN), China Mobile Limited (NYSE:CHL), McDonald's Corporation (NYSE:MCD), and Accenture Plc (NYSE:ACN). This group of stocks' market valuations match NKE's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UL,13,149078,0 TMO,73,4525711,-7 AZN,38,1920506,12 AMGN,51,1794209,-1 CHL,9,456289,-2 MCD,57,1356732,-9 ACN,44,1080127,-5 Average,40.7,1611807,-1.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.7 hedge funds with bullish positions and the average amount invested in these stocks was $1612 million. That figure was $2603 million in NKE's case. Thermo Fisher Scientific Inc. (NYSE:TMO) is the most popular stock in this table. On the other hand China Mobile Limited (NYSE:CHL) is the least popular one with only 9 bullish hedge fund positions. NIKE, Inc. (NYSE:NKE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NKE is 70.7. 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. 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 28.2% in 2020 through August 24th but still beat the market by 20.6 percentage points. Hedge funds were also right about betting on NKE, though not to the same extent, as the stock returned 14.1% since the end of June and outperformed the market as well.

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

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