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Were Hedge Funds Right About TopBuild Corp (BLD)?

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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding TopBuild Corp (NYSE:BLD).

Is TopBuild Corp (NYSE:BLD) the right investment to pursue these days? Money managers were becoming less confident. The number of long hedge fund bets were cut by 1 recently. TopBuild Corp (NYSE:BLD) was in 18 hedge funds' portfolios at the end of March. The all time high for this statistic is 30. Our calculations also showed that BLD isn't among the 30 most popular stocks among hedge funds (click for Q1 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 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.


Louis Bacon Moore of Moore Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 let's analyze the key hedge fund action encompassing TopBuild Corp (NYSE:BLD).

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

Heading into the second quarter of 2021, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the fourth quarter of 2020. Below, you can check out the change in hedge fund sentiment towards BLD over the last 23 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.

Is BLD A Good Stock To Buy?
Is BLD A Good Stock To Buy?

More specifically, ValueAct Capital was the largest shareholder of TopBuild Corp (NYSE:BLD), with a stake worth $46.4 million reported as of the end of March. Trailing ValueAct Capital was Balyasny Asset Management, which amassed a stake valued at $11.7 million. Hosking Partners, Millennium Management, and Two Sigma Advisors 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 ValueAct Capital allocated the biggest weight to TopBuild Corp (NYSE:BLD), around 0.54% of its 13F portfolio. Quantinno Capital is also relatively very bullish on the stock, designating 0.25 percent of its 13F equity portfolio to BLD.

Seeing as TopBuild Corp (NYSE:BLD) has faced a decline in interest from hedge fund managers, it's safe to say that there exists a select few fund managers who were dropping their entire stakes heading into Q2. It's worth mentioning that Richard Driehaus's Driehaus Capital dropped the biggest investment of all the hedgies watched by Insider Monkey, valued at an estimated $5.4 million in stock. Louis Bacon's fund, Moore Global Investments, also dropped its stock, about $4.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 1 funds heading into Q2.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as TopBuild Corp (NYSE:BLD) but similarly valued. These stocks are Lumentum Holdings Inc (NASDAQ:LITE), Coty Inc (NYSE:COTY), Denali Therapeutics Inc. (NASDAQ:DNLI), TFI International Inc. (NYSE:TFII), Cullen/Frost Bankers, Inc. (NYSE:CFR), ADT Inc. (NYSE:ADT), and Axalta Coating Systems Ltd (NYSE:AXTA). This group of stocks' market values are closest to BLD's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LITE,31,329570,-8 COTY,25,262735,3 DNLI,26,250609,6 TFII,19,164356,9 CFR,11,18887,-6 ADT,16,283810,-8 AXTA,43,1563342,-3 Average,24.4,410473,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.4 hedge funds with bullish positions and the average amount invested in these stocks was $410 million. That figure was $104 million in BLD's case. Axalta Coating Systems Ltd (NYSE:AXTA) is the most popular stock in this table. On the other hand Cullen/Frost Bankers, Inc. (NYSE:CFR) is the least popular one with only 11 bullish hedge fund positions. TopBuild Corp (NYSE:BLD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for BLD is 32.9. 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 negative signal and 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 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately BLD wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); BLD investors were disappointed as the stock returned -5.1% since the end of March (through 7/23) 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 most of these stocks already outperformed the market in 2021.

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