How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Fortune Brands Home & Security Inc (NYSE:FBHS) and determine whether hedge funds had an edge regarding this stock.
Is Fortune Brands Home & Security Inc (NYSE:FBHS) ready to rally soon? Investors who are in the know were getting more bullish. The number of long hedge fund bets moved up by 3 recently. Fortune Brands Home & Security Inc (NYSE:FBHS) was in 34 hedge funds’ portfolios at the end of June. The all time high for this statistics is 37. Our calculations also showed that FBHS isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.
Robert Atchinson of Adage Capital Management
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we’re going to take a gander at the fresh hedge fund action regarding Fortune Brands Home & Security Inc (NYSE:FBHS).
Hedge fund activity in Fortune Brands Home & Security Inc (NYSE:FBHS)
At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards FBHS over the last 20 quarters. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Phill Gross and Robert Atchinson’s Adage Capital Management has the biggest position in Fortune Brands Home & Security Inc (NYSE:FBHS), worth close to $80.5 million, comprising 0.2% of its total 13F portfolio. On Adage Capital Management’s heels is Brandon Haley of Holocene Advisors, with a $74.4 million position; 0.7% of its 13F portfolio is allocated to the stock. Other peers that hold long positions consist of Cliff Asness’s AQR Capital Management, Anand Parekh’s Alyeska Investment Group and Mario Gabelli’s GAMCO Investors. In terms of the portfolio weights assigned to each position Giverny Capital allocated the biggest weight to Fortune Brands Home & Security Inc (NYSE:FBHS), around 3.22% of its 13F portfolio. Holocene Advisors is also relatively very bullish on the stock, setting aside 0.65 percent of its 13F equity portfolio to FBHS.
With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Alyeska Investment Group, managed by Anand Parekh, established the most valuable position in Fortune Brands Home & Security Inc (NYSE:FBHS). Alyeska Investment Group had $38 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $24.6 million position during the quarter. The following funds were also among the new FBHS investors: Clint Carlson’s Carlson Capital, Chuck Royce’s Royce & Associates, and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Fortune Brands Home & Security Inc (NYSE:FBHS) but similarly valued. These stocks are NIO Limited (NYSE:NIO), Dr. Reddy’s Laboratories Limited (NYSE:RDY), 10x Genomics, Inc. (NASDAQ:TXG), Crown Holdings, Inc. (NYSE:CCK), Fastly, Inc. (NYSE:FSLY), Cna Financial Corporation (NYSE:CNA), and NiSource Inc. (NYSE:NI). This group of stocks’ market valuations are similar to FBHS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NIO | 30 | 567819 | 14 |
| RDY | 12 | 173335 | 1 |
| TXG | 19 | 313211 | -1 |
| CCK | 51 | 1239713 | -5 |
| FSLY | 27 | 1662391 | 5 |
| CNA | 12 | 48476 | 0 |
| NI | 21 | 300585 | -6 |
| Average | 24.6 | 615076 | 1.1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.6 hedge funds with bullish positions and the average amount invested in these stocks was $615 million. That figure was $395 million in FBHS’s case. Crown Holdings, Inc. (NYSE:CCK) is the most popular stock in this table. On the other hand Dr. Reddy’s Laboratories Limited (NYSE:RDY) is the least popular one with only 12 bullish hedge fund positions. Fortune Brands Home & Security Inc (NYSE:FBHS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for FBHS is 63.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on FBHS as the stock returned 31.9% since Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Follow Fortune Brands Innovations Inc. (NYSE:FBIN)
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Disclosure: None. This article was originally published at Insider Monkey.
