Did Hedge Funds Make The Right Call On L Brands Inc (LB) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards L Brands Inc (NYSE:LB) at the end of the first quarter and determine whether the smart money was really smart about this stock.

L Brands Inc (NYSE:LB) was in 39 hedge funds’ portfolios at the end of the first quarter of 2020. LB investors should pay attention to a decrease in hedge fund interest in recent months. There were 46 hedge funds in our database with LB holdings at the end of the previous quarter. Our calculations also showed that LB 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 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 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.

Ricky Sandler of Eminence 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. Keeping this in mind let’s check out the new hedge fund action surrounding L Brands Inc (NYSE:LB).

What does smart money think about L Brands Inc (NYSE:LB)?

Heading into the second quarter of 2020, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from one quarter earlier. By comparison, 32 hedge funds held shares or bullish call options in LB a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

More specifically, Lone Pine Capital was the largest shareholder of L Brands Inc (NYSE:LB), with a stake worth $303.6 million reported as of the end of September. Trailing Lone Pine Capital was Melvin Capital Management, which amassed a stake valued at $150.3 million. Steadfast Capital Management, Egerton Capital Limited, and Melvin Capital Management 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 Barington Capital Group allocated the biggest weight to L Brands Inc (NYSE:LB), around 14.1% of its 13F portfolio. Makaira Partners is also relatively very bullish on the stock, designating 6.87 percent of its 13F equity portfolio to LB.

Due to the fact that L Brands Inc (NYSE:LB) has witnessed a decline in interest from hedge fund managers, logic holds that there lies a certain “tier” of hedge funds that decided to sell off their full holdings last quarter. It’s worth mentioning that Ricky Sandler’s Eminence Capital cut the biggest investment of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $105.6 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also sold off its stock, about $88.1 million worth. These transactions are important to note, as total hedge fund interest was cut by 7 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as L Brands Inc (NYSE:LB) but similarly valued. These stocks are Pure Storage, Inc. (NYSE:PSTG), FirstService Corporation (TSE:FSV), Silgan Holdings Inc. (NASDAQ:SLGN), and The Middleby Corporation (NASDAQ:MIDD). This group of stocks’ market values are similar to LB’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $180 million. That figure was $920 million in LB’s case. The Middleby Corporation (NASDAQ:MIDD) is the most popular stock in this table. On the other hand FirstService Corporation (TSE:FSV) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks L Brands Inc (NYSE:LB) 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 returned 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 LB as the stock returned 29.5% in Q2 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.