Do Hedge Funds And Goldman Sachs Think Alike On These Promising Micro-Driven Stocks?

The volatility in the equity markets in the past two months caused by deteriorating macros has taken a toll on the stocks of a lot of companies, regardless of the sectors these companies operate in. In situations like these when macro economic factors take precedence over the underlying fundamentals of a stock, it becomes difficult for investors to pick individual stocks and also to hold on to their conviction in stocks they already own. To help out investors in their stock selection in the current environment, Goldman Sachs Group Inc (NYSE:GS) recently published a list of the top 25 stocks with the highest dispersion scores which are also rated by the investment bank as having strong upside potential. According to the firm, the dispersion scores “reflect a combination of each stock’s sensitivity to company-specific fundamentals and risk. Names with high dispersion scores are much more likely to react to firm-specific developments versus the macro environment“. In this article we are going to look at five of these stocks from Goldman’s list and discuss what the hedge funds covered by us think about them.

Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 60 percentage points since the end of August 2012, returning 118% (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.

5. Urban Outfitters, Inc. (NASDAQ:URBN)

Investors with Long Positions (as of June 30): 28

Aggregate Value of Investors’ Holdings (as of June 30): $266.82 Million

Let’s start with lifestyle retailer Urban Outfitters, Inc. (NASDAQ:URBN), which has an upside potential of 34% to Goldman’s price target and a dispersion score of 3.5. Although the stock of Urban Outfitters, Inc. (NASDAQ:URBN) has gradually declined since April, which included losing 23.3% during the second quarter, the number of hedge funds covered by us that disclosed a stake in the company came down by only one during that period. However, the aggregate value of hedge funds’ holdings in the company during the same period saw a significant decline of 34.18%. Even though the domestic apparel industry is seeing a slowdown in growth, Urban Outfitters has been growing steadily over the past five years and industry experts feel that this growth will continue thanks to its international operations, which are growing much more rapidly than its domestic operations. Lee Munder‘s Lee Munder Capital Group initiated a stake in the company during the second quarter, buying 219,653 shares.

4. Wynn Resorts, Limited (NASDAQ:WYNN)

Investors with Long Positions (as of June 30): 35

Aggregate Value of Investors’ Holdings (as of June 30): $1.24 Billion

Moving on, Wynn Resorts, Limited (NASDAQ:WYNN) has seen its market capitalization dwindle by 60% year-to-date. However, it was Goldman’s top stock pick on its list with a dispersion score of 5.6 and an upside potential of 89%. During the second quarter when the stock lost 21.3%, the number of hedge funds tracked by Insider Monkey that were long in the company went up by ten and the aggregate value of the stakes held by the hedge funds in the company also saw a 32.3% quarter-over-quarter jump, so hedge funds were extremely bullish on the stock as well. Several analysts that cover the stock also remain bullish on it, citing that the enormous decline that it has had since its peak of $245 in March of last year has made it an attractive buy. Billionaire investor David E. Shaw‘s firm D.E. Shaw more than doubled its stake in Wynn Resorts, Limited (NASDAQ:WYNN) during the April-June period to nearly 600,000 shares.

3. Viacom, Inc. (NASDAQ:VIAB)

Investors with Long Positions (as of June 30): 47

Aggregate Value of Investors’ Holdings (as of June 30): $2.25 Billion

Viacom, Inc. (NASDAQ:VIAB) was one of the companies that suffered a major beating when stocks from the media sector slumped recently. Even though it remained largely flat during the first half of the year, the downfall that Viacom, Inc. (NASDAQ:VIAB)’s stock has seen in just under the past three months has resulted in it trading down by 43% year-to-date. Regardless of this, the company managed to take the second spot on Goldman’s list with a dispersion score of 3.3 and an upside potential of 52% to Goldman’s price target. Among the hedge funds we cover, there was an increase in ownership of the company by seven funds during the second quarter. However, the aggregate value of hedge funds’ holdings in it came down by $268 million during the same period. At the end of last month another company in this list, Netflix, Inc. (NASDAQ:NFLX), announced that it is severing its ties with EPIX, a TV network operated by Viacom. Following this, EPIX announced that it is strengthening its relationship with Hulu. Donald Yacktman‘s Yacktman Asset Management was the largest shareholder of Viacom at the end of June among the funds covered by us, owning 9.27 million shares.

2. Netflix, Inc. (NASDAQ:NFLX)

Investors with Long Positions (as of June 30): 50

Aggregate Value of Investors’ Holdings (as of June 30): $6.15 Billion

Netflix, Inc. (NASDAQ:NFLX) is the only company in this list whose shares are trading in the green for the year, and very green at that, up by over 100%. Even though the shares of the company have slid by almost 20% from their peak in August, Goldman Sachs, having assigned it the highest dispersion score of 9.9, believes that it is poised to move higher by 30% to its price target. The number of hedge funds tracked by us that reported a stake in the company went up by three during the second quarter, when the company’s stock rose by 57.7%. At the same time, the aggregate value of hedge funds’ holdings in the company also saw a massive increase of $2.28 billion. In the past few weeks, some industry watchers have become skeptical about the stock, citing the increasing challenges it faces. The most prominent among them is that media companies, which provide the bulk of content on Netflix through licensing, are changing their tactics by increasing licensing costs and syndicating their content to other platforms. With Amazon having started a feature through which Prime users can download videos for offline viewing, experts believe that Netflix will have to follow suit and this could have a serious impact on its business model. Chase Coleman‘s Tiger Global Management LLC increased its stake in the stock by more than 15 times during the second quarter to over 2.5 million shares.

1. Dollar Tree, Inc. (NASDAQ:DLTR)

Investors with Long Positions (as of June 30): 60

Aggregate Value of Investors’ Holdings (as of June 30): $3.31 Billion

Although Dollar Tree, Inc. (NASDAQ:DLTR) was the third top stock on Goldman’s list with a dispersion score of 2.1 and an upside potential of 44%, it was the most popular stock on this list among hedge funds during the second quarter. The phenomenal rise that shares of Dollar Tree, Inc. (NASDAQ:DLTR) had during the first three months of the year has ensured that even after going down significantly following the company’s second quarter earnings release, they are still trading nearly flat for the year. The number of hedge funds tracked by us that were long in the company came down by three during the second quarter and the aggregate value of investors’ holdings in the company also saw a decline of $458 million during the period. On September 1, the company reported EPS of $0.25 for the second quarter, on revenue of $3.01 billion, compared to a analsyts’ consensus estimate of EPS of $0.67 on revenue of $3.04 billion. Analysts that cover the company continue to remain bullish on it, however, a lot of them have reduced their price target on the stock in the past few months. Ken Griffin‘s Citadel Investment Group was one of the hedge funds that reduced its stake in the company during the second quarter; as of June 30 it held nearly 2.29 million shares of Dollar Tree.

Disclosure: None