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Were Hedge Funds Right About Ross Stores, Inc. (ROST) ?

Asma UL Husna
·6 min read

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Ross Stores, Inc. (NASDAQ:ROST) and determine whether hedge funds skillfully traded this stock.

Ross Stores, Inc. (NASDAQ:ROST) investors should be aware of an increase in activity from the world's largest hedge funds of late. ROST was in 49 hedge funds' portfolios at the end of March. There were 48 hedge funds in our database with ROST positions at the end of the previous quarter. Our calculations also showed that ROST isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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 36% through May 18th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_255014" align="aligncenter" width="392"] Clint Carlson of Carlson Capital[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we're going to take a look at the key hedge fund action encompassing Ross Stores, Inc. (NASDAQ:ROST).

How have hedgies been trading Ross Stores, Inc. (NASDAQ:ROST)?

At the end of the first quarter, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 2% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards ROST over the last 18 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, AQR Capital Management was the largest shareholder of Ross Stores, Inc. (NASDAQ:ROST), with a stake worth $167.7 million reported as of the end of September. Trailing AQR Capital Management was Holocene Advisors, which amassed a stake valued at $145.7 million. Adage Capital Management, BlueSpruce Investments, and Alyeska Investment Group 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 Bristol Gate Capital Partners allocated the biggest weight to Ross Stores, Inc. (NASDAQ:ROST), around 5.9% of its 13F portfolio. Highside Global Management is also relatively very bullish on the stock, dishing out 3.61 percent of its 13F equity portfolio to ROST.

Now, key hedge funds have been driving this bullishness. Holocene Advisors, managed by Brandon Haley, established the biggest position in Ross Stores, Inc. (NASDAQ:ROST). Holocene Advisors had $145.7 million invested in the company at the end of the quarter. Aaron Cowen's Suvretta Capital Management also made a $46.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Bacon's Moore Global Investments, Clint Carlson's Carlson Capital, and John Osterweis's Osterweis Capital Management.

Let's now review hedge fund activity in other stocks similar to Ross Stores, Inc. (NASDAQ:ROST). We will take a look at HCA Healthcare Inc (NYSE:HCA), SBA Communications Corporation (REIT) (NASDAQ:SBAC), Monster Beverage Corp (NASDAQ:MNST), and The Kraft Heinz Company (NASDAQ:KHC). This group of stocks' market values are closest to ROST's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HCA,87,2171218,24 SBAC,46,1835315,1 MNST,43,1843978,-2 KHC,39,8314956,5 Average,53.75,3541367,7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 53.75 hedge funds with bullish positions and the average amount invested in these stocks was $3541 million. That figure was $982 million in ROST's case. HCA Healthcare Inc (NYSE:HCA) is the most popular stock in this table. On the other hand The Kraft Heinz Company (NASDAQ:KHC) is the least popular one with only 39 bullish hedge fund positions. Ross Stores, Inc. (NASDAQ:ROST) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately ROST wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ROST investors were disappointed as the stock returned -2% during the second quarter 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.

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

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