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Were Hedge Funds Right About The Home Depot, Inc. (HD)?

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Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds' and successful investors' positions as of the end of the fourth quarter. You can find articles about an individual hedge fund's trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of The Home Depot, Inc. (NYSE:HD) based on that data.

Is The Home Depot, Inc. (NYSE:HD) undervalued? Investors who are in the know were getting more optimistic. The number of bullish hedge fund bets advanced by 6 lately. The Home Depot, Inc. (NYSE:HD) was in 79 hedge funds' portfolios at the end of December. The all time high for this statistic is 91. Our calculations also showed that HD isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 73 hedge funds in our database with HD holdings at the end of September.

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 124 percentage points since March 2017 (see the details here).

Billionaire David Siegel's Top 10 Stock Picks
Billionaire David Siegel's Top 10 Stock Picks

David Siegel of Two Sigma Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, auto parts business is a recession resistant business, so we are taking a closer look at this discount auto parts stock that is growing at a 196% annualized rate. We go through lists like the 15 best micro-cap stocks to buy now to identify the next stock with 10x upside potential. 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. Now let's take a look at the fresh hedge fund action encompassing The Home Depot, Inc. (NYSE:HD).

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

At Q4's end, a total of 79 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 8% from the previous quarter. By comparison, 91 hedge funds held shares or bullish call options in HD 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.

When looking at the institutional investors followed by Insider Monkey, Ken Fisher's Fisher Asset Management has the biggest position in The Home Depot, Inc. (NYSE:HD), worth close to $1.8184 billion, corresponding to 1.4% of its total 13F portfolio. Coming in second is AQR Capital Management, managed by Cliff Asness, which holds a $482.2 million position; 0.9% of its 13F portfolio is allocated to the company. Other members of the smart money with similar optimism contain John Overdeck and David Siegel's Two Sigma Advisors, Phill Gross and Robert Atchinson's Adage Capital Management and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Pittencrieff Partners - Gabalex Capital allocated the biggest weight to The Home Depot, Inc. (NYSE:HD), around 6.76% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, designating 6.06 percent of its 13F equity portfolio to HD.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Voleon Capital, managed by Michael Kharitonov and Jon David McAuliffe, assembled the most valuable position in The Home Depot, Inc. (NYSE:HD). Voleon Capital had $37.7 million invested in the company at the end of the quarter. Brian Scudieri's Kehrs Ridge Capital also initiated a $10.6 million position during the quarter. The other funds with new positions in the stock are Greg Poole's Echo Street Capital Management, Jinghua Yan's TwinBeech Capital, and Mark R. Freeman's Socorro Asset Management.

Let's also examine hedge fund activity in other stocks similar to The Home Depot, Inc. (NYSE:HD). These stocks are Paypal Holdings Inc (NASDAQ:PYPL), Bank of America Corporation (NYSE:BAC), Verizon Communications Inc. (NYSE:VZ), Adobe Inc. (NASDAQ:ADBE), Comcast Corporation (NASDAQ:CMCSA), Netflix, Inc. (NASDAQ:NFLX), and The Coca-Cola Company (NYSE:KO). This group of stocks' market values are similar to HD's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PYPL,147,15961182,-3 BAC,99,35340008,11 VZ,67,10502830,2 ADBE,114,11927730,8 CMCSA,84,8831767,2 NFLX,116,15633343,12 KO,62,24683372,2 Average,98.4,17554319,4.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 98.4 hedge funds with bullish positions and the average amount invested in these stocks was $17554 million. That figure was $4924 million in HD's case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand The Coca-Cola Company (NYSE:KO) is the least popular one with only 62 bullish hedge fund positions. The Home Depot, Inc. (NYSE:HD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HD is 46. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.3% in 2021 through April 19th and still beat the market by 0.9 percentage points. A small number of hedge funds were also right about betting on HD as the stock returned 23.8% since the end of the fourth quarter (through 4/19) and outperformed the market by an even larger margin.

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

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