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Were Hedge Funds Right About Turning Bullish On Mohawk Industries, Inc. (MHK)?

Reymerlyn Martin

"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Mohawk Industries, Inc. (NYSE:MHK) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Is Mohawk Industries, Inc. (NYSE:MHK) ready to rally soon? Investors who are in the know are taking a bullish view. The number of long hedge fund positions advanced by 2 recently. Our calculations also showed that MHK isn't among the 30 most popular stocks among hedge funds. MHK was in 34 hedge funds' portfolios at the end of the first quarter of 2019. There were 32 hedge funds in our database with MHK positions at the end of the previous quarter.

To most stock holders, hedge funds are viewed as underperforming, outdated financial tools of years past. While there are over 8000 funds with their doors open at the moment, Our experts choose to focus on the leaders of this group, around 750 funds. It is estimated that this group of investors manage bulk of the smart money's total capital, and by monitoring their top equity investments, Insider Monkey has figured out many investment strategies that have historically beaten Mr. Market. Insider Monkey's flagship hedge fund strategy defeated the S&P 500 index by around 5 percentage points per year since its inception in May 2014 through June 18th. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 28.2% since February 2017 (through June 18th) even though the market was up nearly 30% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 8.2% in a month whereas our long picks outperformed the market by 2.5 percentage points in this volatile 5 week period (our long picks also beat the market by 15 percentage points so far this year).

Boykin Curry EAGLE CAPITAL MANAGEMENT

We're going to check out the new hedge fund action encompassing Mohawk Industries, Inc. (NYSE:MHK).

Hedge fund activity in Mohawk Industries, Inc. (NYSE:MHK)

At Q1's end, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the previous quarter. By comparison, 37 hedge funds held shares or bullish call options in MHK a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

MHK_jun2019

More specifically, Eagle Capital Management was the largest shareholder of Mohawk Industries, Inc. (NYSE:MHK), with a stake worth $579.2 million reported as of the end of March. Trailing Eagle Capital Management was First Pacific Advisors LLC, which amassed a stake valued at $206.8 million. Pzena Investment Management, D E Shaw, and Two Sigma Advisors were also very fond of the stock, giving the stock large weights in their portfolios.

As aggregate interest increased, key hedge funds have been driving this bullishness. Pzena Investment Management, managed by Richard S. Pzena, assembled the most valuable position in Mohawk Industries, Inc. (NYSE:MHK). Pzena Investment Management had $172.2 million invested in the company at the end of the quarter. Ken Griffin's Citadel Investment Group also initiated a $27.5 million position during the quarter. The other funds with brand new MHK positions are Martin D. Sass's MD Sass, Ray Dalio's Bridgewater Associates, and C. Jonathan Gattman's Cloverdale Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Mohawk Industries, Inc. (NYSE:MHK) but similarly valued. These stocks are CF Industries Holdings, Inc. (NYSE:CF), Henry Schein, Inc. (NASDAQ:HSIC), Huaneng Power International Inc (NYSE:HNP), and Levi Strauss & Co. (NYSE:LEVI). This group of stocks' market caps are closest to MHK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CF,32,763506,-10 HSIC,22,1272395,-5 HNP,3,3019,0 LEVI,25,152159,25 Average,20.5,547770,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $548 million. That figure was $1887 million in MHK's case. CF Industries Holdings, Inc. (NYSE:CF) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Mohawk Industries, Inc. (NYSE:MHK) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Hedge funds were also right about betting on MHK as the stock returned 18.2% during the same period and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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