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At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards UFP Industries, Inc. (NASDAQ:UFPI) at the end of the second quarter and determine whether the smart money was really smart about this stock.
UFP Industries, Inc. (NASDAQ:UFPI) was in 18 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 27. UFPI has experienced an increase in hedge fund sentiment in recent months. There were 17 hedge funds in our database with UFPI positions at the end of the first quarter. Our calculations also showed that UFPI 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.
Ken Fisher of Fisher Asset Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's take a look at the new hedge fund action encompassing UFP Industries, Inc. (NASDAQ:UFPI).
How have hedgies been trading UFP Industries, Inc. (NASDAQ:UFPI)?
At the end of June, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards UFPI over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Arrowstreet Capital was the largest shareholder of UFP Industries, Inc. (NASDAQ:UFPI), with a stake worth $16.4 million reported as of the end of September. Trailing Arrowstreet Capital was AQR Capital Management, which amassed a stake valued at $10.8 million. Royce & Associates, SG Capital Management, and Fisher Asset 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 SG Capital Management allocated the biggest weight to UFP Industries, Inc. (NASDAQ:UFPI), around 1.77% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, designating 1.12 percent of its 13F equity portfolio to UFPI.
As one would reasonably expect, key hedge funds were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most valuable position in UFP Industries, Inc. (NASDAQ:UFPI). Arrowstreet Capital had $16.4 million invested in the company at the end of the quarter. Cliff Asness's AQR Capital Management also made a $10.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Chuck Royce's Royce & Associates, Ken Grossman and Glen Schneider's SG Capital Management, and Ken Fisher's Fisher Asset Management.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as UFP Industries, Inc. (NASDAQ:UFPI) but similarly valued. These stocks are Synovus Financial Corp. (NYSE:SNV), J2 Global Inc (NASDAQ:JCOM), Sprouts Farmers Market Inc (NASDAQ:SFM), Omnicell, Inc. (NASDAQ:OMCL), Werner Enterprises, Inc. (NASDAQ:WERN), KB Home (NYSE:KBH), and Bandwidth Inc. (NASDAQ:BAND). This group of stocks' market caps match UFPI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SNV,27,185112,-6 JCOM,30,203643,9 SFM,25,467061,-5 OMCL,16,61075,-1 WERN,32,389115,15 KBH,23,334345,-2 BAND,30,293956,-3 Average,26.1,276330,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $276 million. That figure was $69 million in UFPI's case. Werner Enterprises, Inc. (NASDAQ:WERN) is the most popular stock in this table. On the other hand Omnicell, Inc. (NASDAQ:OMCL) is the least popular one with only 16 bullish hedge fund positions. UFP Industries, Inc. (NASDAQ:UFPI) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for UFPI is 32.3. 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 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on UFPI as the stock returned 14.4% in the third quarter and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.