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Were Hedge Funds Right About Ross Stores (ROST)?

Asma UL Husna

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 835 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 Ross Stores, Inc. (NASDAQ:ROST).

Is Ross Stores, Inc. (NASDAQ:ROST) an excellent investment today? Hedge funds are getting more bullish. The number of long hedge fund bets went up by 4 recently. Our calculations also showed that ROST 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).

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 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_745225" align="aligncenter" width="397"] Noam Gottesman of GLG Partners[/caption]

Noam Gottesman GLG Partners

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. 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. Now we're going to take a gander at the fresh hedge fund action regarding Ross Stores, Inc. (NASDAQ:ROST).

What does smart money think about Ross Stores, Inc. (NASDAQ:ROST)?

Heading into the first quarter of 2020, a total of 48 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the previous quarter. On the other hand, there were a total of 33 hedge funds with a bullish position in ROST a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

The largest stake in Ross Stores, Inc. (NASDAQ:ROST) was held by AQR Capital Management, which reported holding $268.7 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $119.9 million position. Other investors bullish on the company included BlueSpruce Investments, GLG Partners, and Alyeska Investment Group. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to Ross Stores, Inc. (NASDAQ:ROST), around 4.56% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, earmarking 3.6 percent of its 13F equity portfolio to ROST.

As aggregate interest increased, some big names have been driving this bullishness. MIK Capital, managed by Kamyar Khajavi, established the most outsized position in Ross Stores, Inc. (NASDAQ:ROST). MIK Capital had $9.3 million invested in the company at the end of the quarter. Gregg Moskowitz's Interval Partners also initiated a $6.4 million position during the quarter. The other funds with new positions in the stock are Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital, Robert Pitts's Steadfast Capital Management, and Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Ross Stores, Inc. (NASDAQ:ROST) but similarly valued. We will take a look at Ferrari N.V. (NYSE:RACE), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Barclays PLC (NYSE:BCS), and Ecopetrol S.A. (NYSE:EC). All of these stocks' market caps are similar to ROST's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RACE,36,2003827,2 REGN,37,931314,2 BCS,11,115501,-4 EC,11,229258,1 Average,23.75,819975,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $820 million. That figure was $1029 million in ROST's case. Regeneron Pharmaceuticals Inc (NASDAQ:REGN) is the most popular stock in this table. On the other hand Barclays PLC (NYSE:BCS) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Ross Stores, Inc. (NASDAQ:ROST) 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 ROST wasn't nearly as popular as these 10 stocks and hedge funds that were betting on ROST were disappointed as the stock returned -23.4% 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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