We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is RH (NYSE:RH) going to take off soon? Hedge funds are becoming more confident. The number of bullish hedge fund bets inched up by 4 lately. Our calculations also showed that RH isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). RH was in 32 hedge funds’ portfolios at the end of the third quarter of 2019. There were 28 hedge funds in our database with RH holdings at the end of the previous quarter.
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.
Warren Buffett of Berkshire Hathaway
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Keeping this in mind let’s take a look at the recent hedge fund action encompassing RH (NYSE:RH).
What have hedge funds been doing with RH (NYSE:RH)?
Heading into the fourth quarter of 2019, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in RH over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
The largest stake in RH (NYSE:RH) was held by Berkshire Hathaway, which reported holding $206.3 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $197 million position. Other investors bullish on the company included Miller Value Partners, Nantahala Capital Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Miller Value Partners allocated the biggest weight to RH (NYSE:RH), around 4.67% of its 13F portfolio. Wallace Capital Management is also relatively very bullish on the stock, dishing out 4.03 percent of its 13F equity portfolio to RH.
As one would reasonably expect, key money managers were leading the bulls’ herd. Berkshire Hathaway, managed by Warren Buffett, initiated the most valuable position in RH (NYSE:RH). Berkshire Hathaway had $206.3 million invested in the company at the end of the quarter. Matthew Hulsizer’s PEAK6 Capital Management also made a $20.1 million investment in the stock during the quarter. The other funds with brand new RH positions are Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital, Lee Ainslie’s Maverick Capital, and Jeffrey Talpins’s Element Capital Management.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as RH (NYSE:RH) but similarly valued. These stocks are Brookfield Business Partners L.P. (NYSE:BBU), Community Bank System, Inc. (NYSE:CBU), Watts Water Technologies Inc (NYSE:WTS), and II-VI, Inc. (NASDAQ:IIVI). All of these stocks’ market caps are similar to RH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BBU | 6 | 10495 | 1 |
| CBU | 13 | 23777 | 1 |
| WTS | 22 | 266224 | 7 |
| IIVI | 31 | 200487 | 10 |
| Average | 18 | 125246 | 4.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $125 million. That figure was $877 million in RH’s case. II-VI, Inc. (NASDAQ:IIVI) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks RH (NYSE:RH) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on RH as the stock returned 86.1% so far in 2019 (through 12/23) 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
