Did Hedge Funds Make The Right Call On Carter’s, Inc. (CRI) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtCarter’s, Inc. (NYSE:CRI) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Carter’s, Inc. (NYSE:CRI) was in 23 hedge funds’ portfolios at the end of the first quarter of 2020. CRI shareholders have witnessed an increase in enthusiasm from smart money of late. There were 21 hedge funds in our database with CRI holdings at the end of the previous quarter. Our calculations also showed that CRI 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let’s take a look at the latest hedge fund action surrounding Carter’s, Inc. (NYSE:CRI).

What does smart money think about Carter’s, Inc. (NYSE:CRI)?

Heading into the second quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the fourth quarter of 2019. By comparison, 19 hedge funds held shares or bullish call options in CRI a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Diamond Hill Capital was the largest shareholder of Carter’s, Inc. (NYSE:CRI), with a stake worth $29.5 million reported as of the end of September. Trailing Diamond Hill Capital was AQR Capital Management, which amassed a stake valued at $29.3 million. Polaris Capital Management, Citadel Investment Group, and Armistice Capital 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 Polaris Capital Management allocated the biggest weight to Carter’s, Inc. (NYSE:CRI), around 1.67% of its 13F portfolio. Manatuck Hill Partners is also relatively very bullish on the stock, earmarking 0.9 percent of its 13F equity portfolio to CRI.

With a general bullishness amongst the heavyweights, key money managers were leading the bulls’ herd. Armistice Capital, managed by Steven Boyd, initiated the largest position in Carter’s, Inc. (NYSE:CRI). Armistice Capital had $14.1 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also initiated a $4.5 million position during the quarter. The other funds with new positions in the stock are D. E. Shaw’s D E Shaw, Mike Vranos’s Ellington, and Brandon Haley’s Holocene Advisors.

Let’s go over hedge fund activity in other stocks similar to Carter’s, Inc. (NYSE:CRI). We will take a look at The Descartes Systems Group Inc (NASDAQ:DSGX), NeoGenomics, Inc. (NASDAQ:NEO), Virgin Galactic Holdings, Inc. (NYSE:SPCE), and Hess Midstream LP (NYSE:HESM). This group of stocks’ market valuations resemble CRI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $54 million. That figure was $150 million in CRI’s case. Virgin Galactic Holdings, Inc. (NYSE:SPCE) is the most popular stock in this table. On the other hand Hess Midstream LP (NYSE:HESM) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Carter’s, Inc. (NYSE:CRI) 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 CRI, though not to the same extent, as the stock returned 22.8% in Q2 and outperformed the market as well.

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