It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like HD Supply Holdings Inc (NASDAQ:HDS).
Is HD Supply Holdings Inc (NASDAQ:HDS) going to take off soon? Hedge funds are becoming more confident. The number of long hedge fund bets rose by 3 recently. Our calculations also showed that HDS isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_30594" align="aligncenter" width="600"] Barry Rosenstein of JANA Partners[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's review the recent hedge fund action regarding HD Supply Holdings Inc (NASDAQ:HDS).
How are hedge funds trading HD Supply Holdings Inc (NASDAQ:HDS)?
At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in HDS over the last 17 quarters. With the smart money's capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
Among these funds, Iridian Asset Management held the most valuable stake in HD Supply Holdings Inc (NASDAQ:HDS), which was worth $232.5 million at the end of the third quarter. On the second spot was Sculptor Capital which amassed $159.8 million worth of shares. D E Shaw, JANA Partners, and AQR Capital 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 Marathon Partners allocated the biggest weight to HD Supply Holdings Inc (NASDAQ:HDS), around 16.84% of its portfolio. Marlowe Partners is also relatively very bullish on the stock, setting aside 13.9 percent of its 13F equity portfolio to HDS.
As one would reasonably expect, key hedge funds have jumped into HD Supply Holdings Inc (NASDAQ:HDS) headfirst. Third Point, managed by Dan Loeb, established the most outsized position in HD Supply Holdings Inc (NASDAQ:HDS). Third Point had $39.2 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also initiated a $29.8 million position during the quarter. The following funds were also among the new HDS investors: David Steinberg and Eric Udoff's Marlowe Partners, Mario Cibelli's Marathon Partners, and Sander Gerber's Hudson Bay Capital Management.
Let's also examine 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 Charles River Laboratories International Inc. (NYSE:CRL), East West Bancorp, Inc. (NASDAQ:EWBC), Watsco Inc (NYSE:WSO), and HubSpot Inc (NYSE:HUBS). All of these stocks' market caps resemble HDS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CRL,32,875494,3 EWBC,27,426545,-1 WSO,18,138904,-4 HUBS,34,820740,1 Average,27.75,565421,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $565 million. That figure was $965 million in HDS's case. HubSpot Inc (NYSE:HUBS) is the most popular stock in this table. On the other hand Watsco Inc (NYSE:WSO) is the least popular one with only 18 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 1.7% during the fourth quarter (through the end of November) 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.