Did Hedge Funds Make The Right Call On Herbalife Nutrition Ltd. (HLF) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at 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. 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 we look at how hedge funds traded Herbalife Nutrition Ltd. (NYSE:HLF) and determine whether the smart money was really smart about this stock.

Herbalife Nutrition Ltd. (NYSE:HLF) was in 31 hedge funds’ portfolios at the end of the first quarter of 2020. HLF has experienced a decrease in hedge fund sentiment lately. There were 32 hedge funds in our database with HLF holdings at the end of the previous quarter. Our calculations also showed that HLF 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.

Stephen Mandel of Lone Pine Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. Now we’re going to take a look at the recent hedge fund action regarding Herbalife Nutrition Ltd. (NYSE:HLF).

What have hedge funds been doing with Herbalife Nutrition Ltd. (NYSE:HLF)?

At the end of the first quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. On the other hand, there were a total of 32 hedge funds with a bullish position in HLF a year ago. 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, Icahn Capital LP was the largest shareholder of Herbalife Nutrition Ltd. (NYSE:HLF), with a stake worth $1027.2 million reported as of the end of September. Trailing Icahn Capital LP was Deccan Value Advisors, which amassed a stake valued at $367.2 million. Renaissance Technologies, Route One Investment Company, and Bronte 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 Deccan Value Advisors allocated the biggest weight to Herbalife Nutrition Ltd. (NYSE:HLF), around 31.54% of its 13F portfolio. Bronte Capital is also relatively very bullish on the stock, setting aside 11.05 percent of its 13F equity portfolio to HLF.

Since Herbalife Nutrition Ltd. (NYSE:HLF) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there exists a select few money managers who were dropping their positions entirely heading into Q4. At the top of the heap, Lone Pine Capital dropped the largest stake of all the hedgies monitored by Insider Monkey, valued at an estimated $185.6 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dropped its stock, about $18.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Herbalife Nutrition Ltd. (NYSE:HLF) but similarly valued. These stocks are IAA, Inc. (NYSE:IAA), Enphase Energy Inc (NASDAQ:ENPH), CDK Global Inc (NASDAQ:CDK), and ITT Inc. (NYSE:ITT). This group of stocks’ market values resemble HLF’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $432 million. That figure was $2056 million in HLF’s case. IAA, Inc. (NYSE:IAA) is the most popular stock in this table. On the other hand CDK Global Inc (NASDAQ:CDK) is the least popular one with only 24 bullish hedge fund positions. Herbalife Nutrition Ltd. (NYSE:HLF) is not the least popular stock in this group but hedge fund interest is still below average. 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on HLF as the stock returned 54.3% during the second quarter and outperformed the market by an even larger margin.

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