Constellation Brands, Inc. (STZ): Are Hedge Funds Right About This Stock?

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 Constellation Brands, Inc. (NYSE:STZ) and determine whether hedge funds had an edge regarding this stock.

Is Constellation Brands, Inc. (NYSE:STZ) the right investment to pursue these days? Prominent investors were in a bearish mood. The number of bullish hedge fund bets fell by 2 in recent months. Our calculations also showed that STZ 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.

Michael Lowenstein of Kensico Capital

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. Keeping this in mind let’s take a glance at the latest hedge fund action surrounding Constellation Brands, Inc. (NYSE:STZ).

How have hedgies been trading Constellation Brands, Inc. (NYSE:STZ)?

At Q1’s end, a total of 50 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in STZ 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, Kensico Capital was the largest shareholder of Constellation Brands, Inc. (NYSE:STZ), with a stake worth $586.2 million reported as of the end of September. Trailing Kensico Capital was Palestra Capital Management, which amassed a stake valued at $96 million. Two Creeks Capital Management, Candlestick Capital Management, and D E Shaw 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 Kensico Capital allocated the biggest weight to Constellation Brands, Inc. (NYSE:STZ), around 16.02% of its 13F portfolio. Freshford Capital Management is also relatively very bullish on the stock, designating 11.87 percent of its 13F equity portfolio to STZ.

Since Constellation Brands, Inc. (NYSE:STZ) has faced falling interest from hedge fund managers, it’s safe to say that there is a sect of hedgies that decided to sell off their entire stakes last quarter. Interestingly, Renaissance Technologies dropped the biggest position of the 750 funds monitored by Insider Monkey, worth close to $46 million in stock, and Oscar Hattink’s BlueDrive Global Investors was right behind this move, as the fund dumped about $32.3 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 2 funds last quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Constellation Brands, Inc. (NYSE:STZ) but similarly valued. These stocks are Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), Lloyds Banking Group PLC (NYSE:LYG), Consolidated Edison, Inc. (NYSE:ED), and Eversource Energy (NYSE:ES). This group of stocks’ market values match STZ’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $427 million. That figure was $1505 million in STZ’s case. Eversource Energy (NYSE:ES) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Constellation Brands, Inc. (NYSE:STZ) 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on STZ, though not to the same extent, as the stock returned 22.6% in Q2 and outperformed the market as well.

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