Citi Loves These 4 Retail Stocks But Hedge Fund Metric Urges Caution

In a research note to clients published recently, Citigroup Inc (NYSE:C) initiated coverage on several stocks from the retail sector. Describing retail as a “stormy sector”, analyst Paul Lejuez argued in his note that even though macro conditions remain volatile and headlines “change by the hour”, the consumer ” is fine (not great, not weak) but importantly, there is enough uncertainty to play a role into how we think about certain subsectors and companies within our universe.” Considering that the undertone of the note was far from being overly bullish, it was surprising that out of the 20 stocks on which Citi initiated coverage, only two were rated as a ‘Sell’. Which is why we at Insider Monkey decided to take a closer look at Citi’s top four picks from the sector and compare their popularity among the hedge funds we track. Read further to know if smart money agrees with Citi’s analysis on these particular retail stocks.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by over 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

4. Urban Outfitters, Inc. (NASDAQ:URBN)

– Investors with Long Positions (as of June 30): 28
– Aggregate Value of Investors’ Holdings (as of June 30): $266.82 Million

Although Citi thinks Urban Outfitters, Inc. (NASDAQ:URBN) is currently a ‘Buy’, and has a price target of $40 on the stock, which is 30% more than the stock’s current trading price, the popularity of the company among hedge funds doesn’t suggest that should be the case. During the second quarter, the number of funds we track that reported a stake in the company declined by one, while the aggregate value of their holdings in the company saw a drop of 34.18%, with those investors owning just 6.00% of the company’s shares. Though shares of Urban Outfitters, Inc. (NASDAQ:URBN) had a decent run during the first three months of the year, they have gradually declined since then and currently trade down by more than 10% year-to-date. The company was in the news for the wrong reasons this week after it asked employees at its home office to ‘volunteer’ during the weekend without being paid. Israel Englander‘s Millennium Management increased its stake in the company by almost 50-fold during the second quarter to nearly 1.28 million shares.

3. Tiffany & Co. (NYSE:TIF)

– Investors with Long Positions (as of June 30): 33
– Aggregate Value of Investors’ Holdings (as of June 30): $666.8 Million

Even though the number of hedge funds covered by us that were long Tiffany & Co. (NYSE:TIF) came down by four during the second quarter, the aggregate value of their stakes increased by almost 25% during the same period. After cracking hard in January, shares of Tiffany & Co. (NYSE:TIF) remained mostly range bound until July before resuming their downtrend and now trade down by 24% year-to-date. However, analysts at Citi see this downtrend as a great opportunity to get in the stock at a discounted price and expect the company’s free cash flow and great brand name to help the stock reach their price target of $98, which represents nearly 20% upside. On October 8, analysts at Oppenheimer also reiterated their ‘Buy’ rating on the stock. Having increased its stake by 146% to 2.19 million shares during the second quarter, Ken Griffin‘s Citadel Investment Group was the largest shareholder of the company as of June 30, among the funds we cover.

2. TJX Companies Inc (NYSE:TJX)

– Investors with Long Positions (as of June 30): 33
– Aggregate Value of Investors’ Holdings (as of June 30): $1.28 Billion

With gains of over 6%, TJX Companies Inc (NYSE:TJX) is among the few retail sector stocks which is trading in the green this year. This perhaps also explains why it is a popular stock among hedge funds. The number of hedge funds we track that boasted owning TJX Companies Inc (NYSE:TJX) in their portfolio climbed by four during the April-June period and the aggregate value of their holdings also saw a jump of $210 million during that time, though they still owned just 2.80% of its shares. Analysts at Citigroup feel that the company’s growth and high returns make for a ‘winning model’ and that its stock has the potential to reach their price target of $88. This week, the company announced that Ernie Herrman, who has been the president of TJX Companies since 2011, will replace Carol Meyrowitz as the CEO of the company beginning at the start of the next fiscal year. Following this announcement, analysts at Wedbush reiterated their ‘Outperform’ rating and $80 price target on the stock. Gabriel Plotkin‘s Melvin Capital Management was one of the hedge funds that initiated a stake in TJX during the second quarter; as of June 30, it held 1.3 million shares.

1. Lululemon Athletica inc. (NASDAQ:LULU)

– Investors with Long Positions (as of June 30): 35
– Aggregate Value of Investors’ Holdings (as of June 30): $681.28 Million

Lululemon Athletica inc. (NASDAQ:LULU) is not only Citi’s top retail pick, but also the most popular retail stock in this list among the hedge funds tracked by us. During the second quarter, when shares of the company remained largely flat, the number of hedge funds we track that had a stake in it increased by three. However, the aggregate value of stakes held by these funds saw a marginal decline of 4.8% during the same period. Shares of the company slumped by more than 15% on September 10 after it reported its second quarter earnings, even though the numbers came in better than expected. Experts who follow the stock closely cited growing inventories and a high P/E ratio as being among the reasons that led to the pullback in the stock. Nevertheless, analysts at Citigroup are bullish on the company because of its “great global brand expansion, great category and momentum” and have a price target of $69 on it, which represents potential upside of more than 30%. Ken Griffin’s Citadel Investment Group was also the largest shareholder of Lululemon Athletica inc. (NASDAQ:LULU) at the end of the second quarter among the funds tracked by Insider Monkey, owning over 2.0 million shares of the company.

Disclosure: None