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

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Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 900 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about D.R. Horton, Inc. (NYSE:DHI).

Is D.R. Horton, Inc. (NYSE:DHI) going to take off soon? The smart money was in a pessimistic mood. The number of bullish hedge fund positions fell by 5 recently. D.R. Horton, Inc. (NYSE:DHI) was in 45 hedge funds' portfolios at the end of the second quarter of 2021. The all time high for this statistic is 66. Our calculations also showed that DHI isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 50 hedge funds in our database with DHI holdings at the end of March.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 185.4% since March 2017 and outperformed the S&P 500 ETFs by more than 79 percentage points (see the details here). That's why we believe hedge fund sentiment is a 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. For example, billionaire John Paulson is loading up on the miners, so we are checking out stock pitches like this mining stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let's analyze the recent hedge fund action encompassing D.R. Horton, Inc. (NYSE:DHI).

Do Hedge Funds Think DHI Is A Good Stock To Buy Now?

At the end of June, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 66 hedge funds with a bullish position in DHI a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Egerton Capital Limited was the largest shareholder of D.R. Horton, Inc. (NYSE:DHI), with a stake worth $752.6 million reported as of the end of June. Trailing Egerton Capital Limited was Soros Fund Management, which amassed a stake valued at $385.3 million. Echo Street Capital Management, Appaloosa Management LP, and Greenhaven Associates 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 Soros Fund Management allocated the biggest weight to D.R. Horton, Inc. (NYSE:DHI), around 6.49% of its 13F portfolio. Land & Buildings Investment Management is also relatively very bullish on the stock, setting aside 4.48 percent of its 13F equity portfolio to DHI.

Since D.R. Horton, Inc. (NYSE:DHI) has witnessed bearish sentiment from the smart money, logic holds that there was a specific group of money managers that slashed their full holdings by the end of the second quarter. It's worth mentioning that Benjamin A. Smith's Laurion Capital Management sold off the largest position of all the hedgies followed by Insider Monkey, worth about $17.8 million in stock. Steve Cohen's fund, Point72 Asset Management, also dropped its stock, about $6.7 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 5 funds by the end of the second quarter.

Let's go over hedge fund activity in other stocks similar to D.R. Horton, Inc. (NYSE:DHI). We will take a look at The Williams Companies, Inc. (NYSE:WMB), Mettler-Toledo International Inc. (NYSE:MTD), ArcelorMittal (NYSE:MT), V.F. Corporation (NYSE:VFC), AutoZone, Inc. (NYSE:AZO), Datadog, Inc. (NASDAQ:DDOG), and NatWest Group plc (NYSE:NWG). This group of stocks' market caps are similar to DHI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WMB,39,551010,5 MTD,35,1267774,8 MT,22,1044502,1 VFC,32,1005658,1 AZO,34,545700,0 DDOG,56,3235244,12 NWG,5,6649,-1 Average,31.9,1093791,3.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.9 hedge funds with bullish positions and the average amount invested in these stocks was $1094 million. That figure was $1887 million in DHI's case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand NatWest Group plc (NYSE:NWG) is the least popular one with only 5 bullish hedge fund positions. D.R. Horton, Inc. (NYSE:DHI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DHI is 59.7. 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. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 through November 5th and beat the market again by 3.1 percentage points. Unfortunately DHI wasn't nearly as popular as these 5 stocks and hedge funds that were betting on DHI were disappointed as the stock returned 2.6% since the end of June (through 11/5) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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