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Was The Smart Money Right About Piling Into Carter’s, Inc. (CRI)?

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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Carter's, Inc. (NYSE:CRI).

Carter's, Inc. (NYSE:CRI) investors should be aware of an increase in hedge fund sentiment lately. Carter's, Inc. (NYSE:CRI) was in 33 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 46. There were 23 hedge funds in our database with CRI positions at the end of the first quarter. Our calculations also showed that CRI 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.

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 58 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.

Bernard Horn of Polaris Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. 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 we're going to take a gander at the key hedge fund action regarding Carter's, Inc. (NYSE:CRI).

What does smart money think about Carter's, Inc. (NYSE:CRI)?

At second quarter's end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 43% from the first quarter of 2020. By comparison, 25 hedge funds held shares or bullish call options in CRI a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Citadel Investment Group held the most valuable stake in Carter's, Inc. (NYSE:CRI), which was worth $57.5 million at the end of the third quarter. On the second spot was Polaris Capital Management which amassed $34.9 million worth of shares. Diamond Hill Capital, Balyasny Asset Management, 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 Polaris Capital Management allocated the biggest weight to Carter's, Inc. (NYSE:CRI), around 1.72% of its 13F portfolio. Weld Capital Management is also relatively very bullish on the stock, earmarking 0.77 percent of its 13F equity portfolio to CRI.

Consequently, key money managers have jumped into Carter's, Inc. (NYSE:CRI) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, created the biggest position in Carter's, Inc. (NYSE:CRI). Balyasny Asset Management had $30.1 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also made a $13.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Bacon's Moore Global Investments, Steve Cohen's Point72 Asset Management, and Israel Englander's Millennium Management.

Let's now take a look at hedge fund activity in other stocks similar to Carter's, Inc. (NYSE:CRI). We will take a look at Allakos Inc. (NASDAQ:ALLK), Rexnord Corp (NYSE:RXN), ASGN Incorporated (NYSE:ASGN), Companhia Brasileira de Distrib. (NYSE:CBD), Appian Corporation (NASDAQ:APPN), LG Display Co Ltd. (NYSE:LPL), and Kinsale Capital Group, Inc. (NASDAQ:KNSL). This group of stocks' market valuations match CRI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALLK,14,311817,2 RXN,27,348031,8 ASGN,13,73867,-6 CBD,6,19316,1 APPN,18,467607,1 LPL,5,16158,1 KNSL,14,37234,7 Average,13.9,182004,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.9 hedge funds with bullish positions and the average amount invested in these stocks was $182 million. That figure was $269 million in CRI's case. Rexnord Corp (NYSE:RXN) is the most popular stock in this table. On the other hand LG Display Co Ltd. (NYSE:LPL) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Carter's, Inc. (NYSE:CRI) is more popular among hedge funds. Our overall hedge fund sentiment score for CRI is 81.5. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Unfortunately CRI wasn't nearly as popular as these 10 stocks and hedge funds that were betting on CRI were disappointed as the stock returned 0.9% since the end of the second quarter (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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