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Were Hedge Funds Right About Abercrombie & Fitch Co. (ANF)?

Debasis Saha

Hedge funds don't get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don't realize is that 100% of the passive funds didn't see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let's see whether Abercrombie & Fitch Co. (NYSE:ANF) makes for a good investment at the moment.

Abercrombie & Fitch Co. (NYSE:ANF) has seen an increase in support from the world's most elite money managers in recent months. ANF was in 26 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 23 hedge funds in our database with ANF holdings at the end of the previous quarter. Our calculations also showed that ANF isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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 41 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.

[caption id="attachment_256989" align="aligncenter" width="400"] Dmitry Balyasny of Balyasny Asset Management[/caption]

Dmitry Balyasny of Balyasny Asset Managemnet

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with high accuracy, so we check out his 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 view the new hedge fund action regarding Abercrombie & Fitch Co. (NYSE:ANF).

How are hedge funds trading Abercrombie & Fitch Co. (NYSE:ANF)?

Heading into the first quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in ANF over the last 18 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ANF A Good Stock To Buy?

Among these funds, Contrarius Investment Management held the most valuable stake in Abercrombie & Fitch Co. (NYSE:ANF), which was worth $88 million at the end of the third quarter. On the second spot was Paradice Investment Management which amassed $51 million worth of shares. Prentice Capital Management, Arrowstreet Capital, and D E Shaw 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 Prentice Capital Management allocated the biggest weight to Abercrombie & Fitch Co. (NYSE:ANF), around 19.47% of its 13F portfolio. Contrarius Investment Management is also relatively very bullish on the stock, earmarking 4.62 percent of its 13F equity portfolio to ANF.

Consequently, key money managers have been driving this bullishness. Prentice Capital Management, managed by Michael Zimmerman, created the largest position in Abercrombie & Fitch Co. (NYSE:ANF). Prentice Capital Management had $41.2 million invested in the company at the end of the quarter. Dmitry Balyasny's Balyasny Asset Management also made a $11.2 million investment in the stock during the quarter. The other funds with brand new ANF positions are Paul Marshall and Ian Wace's Marshall Wace LLP, Robert Pohly's Samlyn Capital, and Anthony Joseph Vaccarino's North Fourth Asset Management.

Let's check out hedge fund activity in other stocks similar to Abercrombie & Fitch Co. (NYSE:ANF). We will take a look at HudBay Minerals Inc Ord Shs (NYSE:HBM), Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC), Omega Flex, Inc. (NASDAQ:OFLX), and Primoris Services Corp (NASDAQ:PRIM). All of these stocks' market caps resemble ANF's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HBM,11,211228,-3 TRHC,6,25982,-5 OFLX,6,5185,1 PRIM,11,32912,-3 Average,8.5,68827,-2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $334 million in ANF's case. HudBay Minerals Inc Ord Shs (NYSE:HBM) is the most popular stock in this table. On the other hand Tabula Rasa HealthCare, Inc. (NASDAQ:TRHC) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Abercrombie & Fitch Co. (NYSE:ANF) is more popular among hedge funds. 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 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately ANF wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ANF were disappointed as the stock returned -40.7% during the four months of 2020 (through May 1st) 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. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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