Hedge Funds Are Feeling Confident About Five Below Inc (FIVE)

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). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. 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 Five Below Inc (NASDAQ:FIVE) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Five Below Inc (NASDAQ:FIVE) undervalued? Investors who are in the know were buying. The number of long hedge fund positions improved by 11 lately. Five Below Inc (NASDAQ:FIVE) was in 42 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that FIVE 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.

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At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. 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 if you have any good ideas send us an email. Now we’re going to go over the recent hedge fund action regarding Five Below Inc (NASDAQ:FIVE).

What have hedge funds been doing with Five Below Inc (NASDAQ:FIVE)?

At the end of the second quarter, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 35% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FIVE over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Five Below Inc (NASDAQ:FIVE) was held by Suvretta Capital Management, which reported holding $118.8 million worth of stock at the end of September. It was followed by Adage Capital Management with a $116.5 million position. Other investors bullish on the company included Citadel Investment Group, Junto Capital Management, and Candlestick Capital Management. In terms of the portfolio weights assigned to each position Pacifica Capital Investments allocated the biggest weight to Five Below Inc (NASDAQ:FIVE), around 20.38% of its 13F portfolio. MIK Capital is also relatively very bullish on the stock, dishing out 5.14 percent of its 13F equity portfolio to FIVE.

As industrywide interest jumped, specific money managers were breaking ground themselves. Suvretta Capital Management, managed by Aaron Cowen, assembled the biggest position in Five Below Inc (NASDAQ:FIVE). Suvretta Capital Management had $118.8 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also initiated a $116.5 million position during the quarter. The following funds were also among the new FIVE investors: Richard Chilton’s Chilton Investment Company, Gregg Moskowitz’s Interval Partners, and Doug Silverman and Alexander Klabin’s Senator Investment Group.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Five Below Inc (NASDAQ:FIVE) but similarly valued. We will take a look at NovoCure Limited (NASDAQ:NVCR), Enphase Energy Inc (NASDAQ:ENPH), Tandem Diabetes Care Inc (NASDAQ:TNDM), Allogene Therapeutics, Inc. (NASDAQ:ALLO), Globant SA (NYSE:GLOB), Huaneng Power International Inc (NYSE:HNP), and AMERCO (NASDAQ:UHAL). All of these stocks’ market caps match FIVE’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.1 hedge funds with bullish positions and the average amount invested in these stocks was $343 million. That figure was $989 million in FIVE’s case. Enphase Energy Inc (NASDAQ:ENPH) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Five Below Inc (NASDAQ:FIVE) is more popular among hedge funds. Our overall hedge fund sentiment score for FIVE is 90. 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. Unfortunately FIVE wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FIVE were disappointed as the stock returned 2.4% since the end of the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

Disclosure: None. This article was originally published at Insider Monkey.