Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Bed Bath & Beyond Inc. (NASDAQ:BBBY).
Is Bed Bath & Beyond Inc. (NASDAQ:BBBY) a bargain? Prominent investors are buying. The number of bullish hedge fund bets went up by 3 lately. Our calculations also showed that BBBY isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Michael Burry of Scion Asset Management
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a glance at the new hedge fund action surrounding Bed Bath & Beyond Inc. (NASDAQ:BBBY).
How have hedgies been trading Bed Bath & Beyond Inc. (NASDAQ:BBBY)?
Heading into the fourth quarter of 2019, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in BBBY a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Legion Partners Asset Management was the largest shareholder of Bed Bath & Beyond Inc. (NASDAQ:BBBY), with a stake worth $54.8 million reported as of the end of September. Trailing Legion Partners Asset Management was Arrowstreet Capital, which amassed a stake valued at $26.1 million. AQR Capital Management, Southpoint Capital Advisors, and Renaissance Technologies 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 Legion Partners Asset Management allocated the biggest weight to Bed Bath & Beyond Inc. (NASDAQ:BBBY), around 13.46% of its 13F portfolio. Scion Asset Management is also relatively very bullish on the stock, setting aside 13.39 percent of its 13F equity portfolio to BBBY.
Now, key hedge funds have jumped into Bed Bath & Beyond Inc. (NASDAQ:BBBY) headfirst. Southpoint Capital Advisors, managed by John Smith Clark, established the most outsized position in Bed Bath & Beyond Inc. (NASDAQ:BBBY). Southpoint Capital Advisors had $10.6 million invested in the company at the end of the quarter. Michael Burry’s Scion Asset Management also initiated a $8 million position during the quarter. The other funds with new positions in the stock are Sculptor Capital, Elise Di Vincenzo Crumbine’s Stormborn Capital Management, and Lee Ainslie’s Maverick Capital.
Let’s go over hedge fund activity in other stocks similar to Bed Bath & Beyond Inc. (NASDAQ:BBBY). These stocks are Actuant Corporation (NYSE:ATU), Sonic Automotive Inc (NYSE:SAH), Qiwi PLC (NASDAQ:QIWI), and Eidos Therapeutics, Inc. (NASDAQ:EIDX). This group of stocks’ market caps are closest to BBBY’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ATU | 10 | 257177 | -2 |
| SAH | 12 | 39925 | 1 |
| QIWI | 13 | 105061 | 0 |
| EIDX | 14 | 185784 | 3 |
| Average | 12.25 | 146987 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $147 million. That figure was $162 million in BBBY’s case. Eidos Therapeutics, Inc. (NASDAQ:EIDX) is the most popular stock in this table. On the other hand Actuant Corporation (NYSE:ATU) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Bed Bath & Beyond Inc. (NASDAQ:BBBY) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on BBBY as the stock returned 37% during the first two months of Q4 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.
