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Hedge Funds Have Never Been Less Bullish On HD Supply Holdings Inc (HDS)

Reymerlyn Martin

Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like HD Supply Holdings Inc (NASDAQ:HDS).

HD Supply Holdings Inc (NASDAQ:HDS) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged but still at its all time low. The stock was in 30 hedge funds' portfolios at the end of June. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as WABCO Holdings Inc. (NYSE:WBC), Royal Gold, Inc (NASDAQ:RGLD), and Anaplan, Inc. (NYSE:PLAN) to gather more data points. Our calculations also showed that HDS isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 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.

Barry Rosenstein JANA PARTNERS

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a glance at the new hedge fund action regarding HD Supply Holdings Inc (NASDAQ:HDS).

What does smart money think about HD Supply Holdings Inc (NASDAQ:HDS)?

Heading into the third quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards HDS over the last 16 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

HDS_oct2019

The largest stake in HD Supply Holdings Inc (NASDAQ:HDS) was held by Iridian Asset Management, which reported holding $189.7 million worth of stock at the end of March. It was followed by D E Shaw with a $137.7 million position. Other investors bullish on the company included OZ Management, JANA Partners, and GLG Partners.

Judging by the fact that HD Supply Holdings Inc (NASDAQ:HDS) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there was a specific group of money managers who were dropping their positions entirely heading into Q3. At the top of the heap, Gabriel Plotkin's Melvin Capital Management cut the largest investment of all the hedgies followed by Insider Monkey, valued at about $39 million in stock, and David Costen Haley's HBK Investments was right behind this move, as the fund dropped about $16.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as HD Supply Holdings Inc (NASDAQ:HDS) but similarly valued. These stocks are WABCO Holdings Inc. (NYSE:WBC), Royal Gold, Inc (NASDAQ:RGLD), Anaplan, Inc. (NYSE:PLAN), and Perrigo Company plc (NASDAQ:PRGO). This group of stocks' market values match HDS's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WBC,33,1345936,-3 RGLD,19,68231,2 PLAN,37,1639092,15 PRGO,21,720516,3 Average,27.5,943444,4.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $943 million. That figure was $894 million in HDS's case. Anaplan, Inc. (NYSE:PLAN) is the most popular stock in this table. On the other hand Royal Gold, Inc (NASDAQ:RGLD) is the least popular one with only 19 bullish hedge fund positions. HD Supply Holdings Inc (NASDAQ:HDS) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately HDS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on HDS were disappointed as the stock returned -2.8% during the third quarter 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.

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