We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the fourth quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4 years and analyze what the smart money thinks of Ulta Beauty, Inc. (NASDAQ:ULTA) based on that data.
Ulta Beauty, Inc. (NASDAQ:ULTA) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 41 hedge funds’ portfolios at the end of the fourth quarter of 2019. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Hasbro, Inc. (NASDAQ:HAS), Citrix Systems, Inc. (NASDAQ:CTXS), and CenturyLink, Inc. (NYSE:CTL) to gather more data points. Our calculations also showed that ULTA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
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 41 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.
Michael Lowenstein of Kensico Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a glance at the latest hedge fund action regarding Ulta Beauty, Inc. (NASDAQ:ULTA).
Hedge fund activity in Ulta Beauty, Inc. (NASDAQ:ULTA)
At the end of the fourth quarter, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ULTA over the last 18 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
Among these funds, D E Shaw held the most valuable stake in Ulta Beauty, Inc. (NASDAQ:ULTA), which was worth $238.1 million at the end of the third quarter. On the second spot was Select Equity Group which amassed $205.7 million worth of shares. Arrowstreet Capital, Citadel Investment Group, and Kensico 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 Element Capital Management allocated the biggest weight to Ulta Beauty, Inc. (NASDAQ:ULTA), around 9.77% of its 13F portfolio. BlueDrive Global Investors is also relatively very bullish on the stock, dishing out 8.29 percent of its 13F equity portfolio to ULTA.
Seeing as Ulta Beauty, Inc. (NASDAQ:ULTA) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there was a specific group of hedgies who were dropping their full holdings by the end of the third quarter. Intriguingly, Ricky Sandler’s Eminence Capital cut the largest investment of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $67.1 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dropped about $47.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ulta Beauty, Inc. (NASDAQ:ULTA) but similarly valued. These stocks are Hasbro, Inc. (NASDAQ:HAS), Citrix Systems, Inc. (NASDAQ:CTXS), CenturyLink, Inc. (NYSE:CTL), and Quest Diagnostics Incorporated (NYSE:DGX). All of these stocks’ market caps are similar to ULTA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HAS | 36 | 523095 | 4 |
| CTXS | 34 | 1513753 | 3 |
| CTL | 34 | 1144168 | 2 |
| DGX | 31 | 433283 | -5 |
| Average | 33.75 | 903575 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $904 million. That figure was $1245 million in ULTA’s case. Hasbro, Inc. (NASDAQ:HAS) is the most popular stock in this table. On the other hand Quest Diagnostics Incorporated (NYSE:DGX) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Ulta Beauty, Inc. (NASDAQ:ULTA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th and still beat the market by 3.2 percentage points. Unfortunately ULTA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ULTA were disappointed as the stock returned -36.2% during the first two and a half months of 2020 (through March 16th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
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.
