U.S. Markets closed

Hedge Funds Have Never Been This Bullish On frontdoor, inc. (FTDR)

Abigail Fisher

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 8 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of frontdoor, inc. (NASDAQ:FTDR).

frontdoor, inc. (NASDAQ:FTDR) shareholders have witnessed an increase in hedge fund interest recently. FTDR was in 34 hedge funds' portfolios at the end of March. There were 24 hedge funds in our database with FTDR positions at the end of the previous quarter. Our calculations also showed that FTDR isn't among the 30 most popular stocks among hedge funds.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

David Brown Hawk Ridge Partners

We're going to go over the new hedge fund action encompassing frontdoor, inc. (NASDAQ:FTDR).

What have hedge funds been doing with frontdoor, inc. (NASDAQ:FTDR)?

Heading into the second quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 42% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in FTDR a year ago. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

FTDR_june2019

Among these funds, Park West Asset Management held the most valuable stake in frontdoor, inc. (NASDAQ:FTDR), which was worth $48.2 million at the end of the first quarter. On the second spot was Armistice Capital which amassed $39 million worth of shares. Moreover, Hoplite Capital Management, Marshall Wace LLP, and Hawk Ridge Management were also bullish on frontdoor, inc. (NASDAQ:FTDR), allocating a large percentage of their portfolios to this stock.

Consequently, specific money managers have jumped into frontdoor, inc. (NASDAQ:FTDR) headfirst. Park West Asset Management, managed by Peter S. Park, created the most outsized position in frontdoor, inc. (NASDAQ:FTDR). Park West Asset Management had $48.2 million invested in the company at the end of the quarter. John Lykouretzos's Hoplite Capital Management also initiated a $38.4 million position during the quarter. The other funds with brand new FTDR positions are Paul Marshall and Ian Wace's Marshall Wace LLP, J. Carlo Cannell's Cannell Capital, and Richard Mashaal's Rima Senvest Management.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as frontdoor, inc. (NASDAQ:FTDR) but similarly valued. These stocks are MorphoSys AG (NASDAQ:MOR), FTI Consulting, Inc. (NYSE:FCN), Steven Madden, Ltd. (NASDAQ:SHOO), and Dorman Products Inc. (NASDAQ:DORM). This group of stocks' market values resemble FTDR's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MOR,7,41009,-2 FCN,17,134797,1 SHOO,18,62053,0 DORM,15,72393,3 Average,14.25,77563,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $78 million. That figure was $435 million in FTDR's case. Steven Madden, Ltd. (NASDAQ:SHOO) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks frontdoor, inc. (NASDAQ:FTDR) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on FTDR as the stock returned 19% during the same period 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.

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

Related Content