Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and a 20% drop in stock prices. Things completely reversed in 2019 and stock indices hit record highs. Recent hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards The Toro Company (NYSE:TTC) to find out whether it was one of their high conviction long-term ideas.
Is The Toro Company (NYSE:TTC) going to take off soon? The best stock pickers are taking a bearish view. The number of bullish hedge fund bets dropped by 5 in recent months. Our calculations also showed that TTC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). TTC was in 19 hedge funds' portfolios at the end of the third quarter of 2019. There were 24 hedge funds in our database with TTC holdings at the end of the previous quarter. Video: Click the image to 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 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 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.
[caption id="attachment_30668" align="aligncenter" width="478"] Richard Chilton of Chilton Investment Company[/caption]
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. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to analyze the fresh hedge fund action encompassing The Toro Company (NYSE:TTC).
How are hedge funds trading The Toro Company (NYSE:TTC)?
Heading into the fourth quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in TTC a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in The Toro Company (NYSE:TTC) was held by Select Equity Group, which reported holding $364 million worth of stock at the end of September. It was followed by Impax Asset Management with a $104.1 million position. Other investors bullish on the company included Fisher Asset Management, Chilton Investment Company, and GLG Partners. In terms of the portfolio weights assigned to each position Bishop Rock Capital allocated the biggest weight to The Toro Company (NYSE:TTC), around 3.69% of its 13F portfolio. Select Equity Group is also relatively very bullish on the stock, setting aside 2.46 percent of its 13F equity portfolio to TTC.
Since The Toro Company (NYSE:TTC) has witnessed bearish sentiment from the smart money, it's safe to say that there were a few hedge funds that decided to sell off their entire stakes heading into Q4. At the top of the heap, John Overdeck and David Siegel's Two Sigma Advisors dumped the biggest position of the 750 funds followed by Insider Monkey, worth an estimated $4.4 million in stock. Michael Gelband's fund, ExodusPoint Capital, also sold off its stock, about $0.9 million worth. These moves are interesting, as aggregate hedge fund interest fell by 5 funds heading into Q4.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as The Toro Company (NYSE:TTC) but similarly valued. These stocks are American Homes 4 Rent (NYSE:AMH), Apartment Investment and Management Co. (NYSE:AIV), Post Holdings Inc (NYSE:POST), and DXC Technology Company (NYSE:DXC). This group of stocks' market caps resemble TTC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMH,23,432164,-2 AIV,24,659456,0 POST,28,1466400,2 DXC,34,1144765,-7 Average,27.25,925696,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $926 million. That figure was $689 million in TTC's case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand American Homes 4 Rent (NYSE:AMH) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks The Toro Company (NYSE:TTC) is even less popular than AMH. 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. A small number of hedge funds were also right about betting on TTC, though not to the same extent, as the stock returned 6.7% during the fourth quarter (through 11/30) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.