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Hedge Funds Started Cashing Out Of The Home Depot, Inc. (HD) During The Crash

Abigail Fisher

In this article you are going to find out whether hedge funds think The Home Depot, Inc. (NYSE:HD) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is The Home Depot, Inc. (NYSE:HD) ready to rally soon? Money managers are selling. The number of bullish hedge fund positions were cut by 4 recently. Our calculations also showed that HD is barely among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). HD was in 87 hedge funds' portfolios at the end of the first quarter of 2020. There were 91 hedge funds in our database with HD holdings at the end of the previous quarter.

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 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 44 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.

[caption id="attachment_364882" align="aligncenter" width="399"] Mark Kingdon of Kingdon Capital[/caption]

Mark Kingdon - Kingdon Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea.  For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we asked astrophysicist Neil deGrasse Tyson about Tesla, Elon Musk, and his top stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let's take a look at the new hedge fund action encompassing The Home Depot, Inc. (NYSE:HD).

Hedge fund activity in The Home Depot, Inc. (NYSE:HD)

Heading into the second quarter of 2020, a total of 87 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HD over the last 18 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

The largest stake in The Home Depot, Inc. (NYSE:HD) was held by Fisher Asset Management, which reported holding $1159 million worth of stock at the end of September. It was followed by AQR Capital Management with a $442.3 million position. Other investors bullish on the company included Two Sigma Advisors, D E Shaw, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Pittencrieff Partners - Gabalex Capital allocated the biggest weight to The Home Depot, Inc. (NYSE:HD), around 6.43% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, setting aside 5.59 percent of its 13F equity portfolio to HD.

Seeing as The Home Depot, Inc. (NYSE:HD) has faced bearish sentiment from hedge fund managers, it's easy to see that there was a specific group of hedgies who sold off their positions entirely in the third quarter. At the top of the heap, Tim Hurd and Ed Magnus's BlueSpruce Investments said goodbye to the biggest stake of all the hedgies monitored by Insider Monkey, comprising close to $124.2 million in stock. Gregg Moskowitz's fund, Interval Partners, also dropped its stock, about $54.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 4 funds in the third quarter.

Let's now take a look at hedge fund activity in other stocks similar to The Home Depot, Inc. (NYSE:HD). These stocks are Merck & Co., Inc. (NYSE:MRK), The Coca-Cola Company (NYSE:KO), Novartis AG (NYSE:NVS), and Bank of America Corporation (NYSE:BAC). All of these stocks' market caps are similar to HD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MRK,78,5025553,1 KO,55,19901708,4 NVS,30,2034578,0 BAC,95,21721713,-4 Average,64.5,12170888,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 64.5 hedge funds with bullish positions and the average amount invested in these stocks was $12171 million. That figure was $3586 million in HD's case. Bank of America Corporation (NYSE:BAC) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 30 bullish hedge fund positions. The Home Depot, Inc. (NYSE:HD) is not the most popular stock in this group but hedge fund interest is still above average. 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 7.9% in 2020 through May 22nd but still beat the market by 15.6 percentage points. Hedge funds were also right about betting on HD as the stock returned 29.5% in Q2 (through May 22nd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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