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Were Hedge Funds Right About Crowding Into D.R. Horton, Inc. (DHI)?

Asma UL Husna
·6 min read

Is D.R. Horton, Inc. (NYSE:DHI) a bargain? The best stock pickers were in an optimistic mood. The number of long hedge fund bets inched up by 1 recently. D.R. Horton, Inc. (NYSE:DHI) was in 66 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 65. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that DHI 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Armitage Egerton Capital
John Armitage Egerton Capital

John Armitage of Egerton Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. Keeping this in mind we're going to review the recent hedge fund action encompassing D.R. Horton, Inc. (NYSE:DHI).

What does smart money think about D.R. Horton, Inc. (NYSE:DHI)?

At second quarter's end, a total of 66 of the hedge funds tracked by Insider Monkey were long this stock, a change of 2% from the first quarter of 2020. By comparison, 47 hedge funds held shares or bullish call options in DHI a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, John Armitage's Egerton Capital Limited has the biggest position in D.R. Horton, Inc. (NYSE:DHI), worth close to $517.7 million, accounting for 3.8% of its total 13F portfolio. Sitting at the No. 2 spot is Edgar Wachenheim of Greenhaven Associates, with a $441.7 million position; 9.8% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish include George Soros's Soros Fund Management, Greg Poole's Echo Street Capital Management and Ricky Sandler's Eminence Capital. In terms of the portfolio weights assigned to each position Greenhaven Associates allocated the biggest weight to D.R. Horton, Inc. (NYSE:DHI), around 9.78% of its 13F portfolio. Mountaineer Partners Management is also relatively very bullish on the stock, designating 8.09 percent of its 13F equity portfolio to DHI.

With a general bullishness amongst the heavyweights, key money managers have jumped into D.R. Horton, Inc. (NYSE:DHI) headfirst. Suvretta Capital Management, managed by Aaron Cowen, established the most valuable position in D.R. Horton, Inc. (NYSE:DHI). Suvretta Capital Management had $65 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also made a $57.4 million investment in the stock during the quarter. The other funds with brand new DHI positions are Robert Pohly's Samlyn Capital, Josh Donfeld and David Rogers's Castle Hook Partners, and Anand Parekh's Alyeska Investment Group.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as D.R. Horton, Inc. (NYSE:DHI) but similarly valued. These stocks are Southwest Airlines Co. (NYSE:LUV), Corteva, Inc. (NYSE:CTVA), Old Dominion Freight Line, Inc. (NASDAQ:ODFL), ZoomInfo Technologies Inc. (NASDAQ:ZI), PPL Corporation (NYSE:PPL), Edison International (NYSE:EIX), and Wheaton Precious Metals Corp. (NYSE:WPM). This group of stocks' market caps resemble DHI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LUV,56,873793,11 CTVA,39,775291,3 ODFL,35,480042,2 ZI,24,157040,24 PPL,25,159807,-3 EIX,37,1670961,8 WPM,21,767509,-4 Average,33.9,697778,5.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.9 hedge funds with bullish positions and the average amount invested in these stocks was $698 million. That figure was $2088 million in DHI's case. Southwest Airlines Co. (NYSE:LUV) is the most popular stock in this table. On the other hand Wheaton Precious Metals Corp. (NYSE:WPM) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks D.R. Horton, Inc. (NYSE:DHI) is more popular among hedge funds. Our overall hedge fund sentiment score for DHI is 86. 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 returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on DHI as the stock returned 39.4% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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