We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Floor & Decor Holdings, Inc. (NYSE:FND) and determine whether hedge funds skillfully traded this stock.
Floor & Decor Holdings, Inc. (NYSE:FND) was in 44 hedge funds' portfolios at the end of June. The all time high for this statistics is 31. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. FND investors should pay attention to an increase in hedge fund sentiment in recent months. There were 23 hedge funds in our database with FND holdings at the end of March. Our calculations also showed that FND 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.
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 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 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.
Colin Moran of Abdiel Capital Advisors
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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 fresh hedge fund action surrounding Floor & Decor Holdings, Inc. (NYSE:FND).
How have hedgies been trading Floor & Decor Holdings, Inc. (NYSE:FND)?
At the end of the second quarter, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 91% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in FND a year ago. With the smart money's sentiment swirling, there exists a few key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
More specifically, Abdiel Capital Advisors was the largest shareholder of Floor & Decor Holdings, Inc. (NYSE:FND), with a stake worth $287.3 million reported as of the end of September. Trailing Abdiel Capital Advisors was Two Creeks Capital Management, which amassed a stake valued at $129.7 million. Broad Bay Capital, Park Presidio Capital, and Columbus Circle Investors 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 Two Creeks Capital Management allocated the biggest weight to Floor & Decor Holdings, Inc. (NYSE:FND), around 9.05% of its 13F portfolio. Broad Bay Capital is also relatively very bullish on the stock, dishing out 8.53 percent of its 13F equity portfolio to FND.
Consequently, key money managers have been driving this bullishness. Park Presidio Capital, managed by Lee Hicks and Jan Koerner, assembled the most valuable position in Floor & Decor Holdings, Inc. (NYSE:FND). Park Presidio Capital had $43.2 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also initiated a $32.1 million position during the quarter. The other funds with brand new FND positions are Amir Mokari's Emerson Point Capital, D. E. Shaw's D E Shaw, and Robert Pitts's Steadfast Capital Management.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Floor & Decor Holdings, Inc. (NYSE:FND) but similarly valued. We will take a look at Voya Financial Inc (NYSE:VOYA), Thor Industries, Inc. (NYSE:THO), Berry Global Group Inc (NYSE:BERY), Axon Enterprise, Inc. (NASDAQ:AAXN), Farfetch Limited (NYSE:FTCH), Donaldson Company, Inc. (NYSE:DCI), and Sensata Technologies Holding plc (NYSE:ST). All of these stocks' market caps are closest to FND's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position VOYA,41,791893,9 THO,39,301565,19 BERY,40,1455029,6 AAXN,39,609333,13 FTCH,37,837456,15 DCI,27,226099,7 ST,33,1073165,7 Average,36.6,756363,10.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 36.6 hedge funds with bullish positions and the average amount invested in these stocks was $756 million. That figure was $818 million in FND's case. Voya Financial Inc (NYSE:VOYA) is the most popular stock in this table. On the other hand Donaldson Company, Inc. (NYSE:DCI) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Floor & Decor Holdings, Inc. (NYSE:FND) is more popular among hedge funds. Our overall hedge fund sentiment score for FND is 90. 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 returned 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on FND as the stock returned 27% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.