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Were Hedge Funds Right About NIKE, Inc. (NKE)?

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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards NIKE, Inc. (NYSE:NKE).

NIKE, Inc. (NYSE:NKE) was in 78 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 82. NKE has seen a decrease in enthusiasm from smart money lately. There were 82 hedge funds in our database with NKE positions at the end of the fourth quarter. Our calculations also showed that NKE isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.

Robert Pohly of Samlyn Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium 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. Now we're going to view the fresh hedge fund action regarding NIKE, Inc. (NYSE:NKE).

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

At the end of March, a total of 78 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NKE over the last 23 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is NKE A Good Stock To Buy?
Is NKE A Good Stock To Buy?

The largest stake in NIKE, Inc. (NYSE:NKE) was held by Fundsmith LLP, which reported holding $1053.5 million worth of stock at the end of December. It was followed by Fisher Asset Management with a $969.7 million position. Other investors bullish on the company included Arrowstreet Capital, GuardCap Asset Management, and Ako Capital. In terms of the portfolio weights assigned to each position Incline Global Management allocated the biggest weight to NIKE, Inc. (NYSE:NKE), around 7.79% of its 13F portfolio. GuardCap Asset Management is also relatively very bullish on the stock, dishing out 7.15 percent of its 13F equity portfolio to NKE.

Since NIKE, Inc. (NYSE:NKE) has faced a decline in interest from the smart money, it's easy to see that there is a sect of fund managers who sold off their full holdings by the end of the first quarter. It's worth mentioning that Dan Loeb's Third Point said goodbye to the largest investment of the "upper crust" of funds monitored by Insider Monkey, worth about $141.5 million in stock, and Jack Woodruff's Candlestick Capital Management was right behind this move, as the fund sold off about $78.5 million worth. These moves are important to note, as total hedge fund interest was cut by 4 funds by the end of the first quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as NIKE, Inc. (NYSE:NKE) but similarly valued. These stocks are Oracle Corporation (NASDAQ:ORCL), Pfizer Inc. (NYSE:PFE), Chevron Corporation (NYSE:CVX), PepsiCo, Inc. (NYSE:PEP), salesforce.com, inc. (NYSE:CRM), Merck & Co., Inc. (NYSE:MRK), and Novartis AG (NYSE:NVS). All of these stocks' market caps are similar to NKE's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ORCL,52,2888444,0 PFE,65,2014186,2 CVX,41,4866758,-9 PEP,61,4882404,5 CRM,91,8837040,-6 MRK,79,6494373,-3 NVS,19,1709243,-4 Average,58.3,4527493,-2.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 58.3 hedge funds with bullish positions and the average amount invested in these stocks was $4527 million. That figure was $5177 million in NKE's case. salesforce.com, inc. (NYSE:CRM) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 19 bullish hedge fund positions. NIKE, Inc. (NYSE:NKE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NKE is 70.5. 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 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 25.8% in 2021 through August 6th and still beat the market by 6.7 percentage points. Hedge funds were also right about betting on NKE as the stock returned 30.3% since the end of Q1 (through 8/6) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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