The U.S. Federal Reserve is set to hold a two-day policy meeting this week, which will either intensify the debate on a potential rate hike or will stop it entirely for the time being. However, many believe that a September rate hike is not well-timed considering the struggling emerging markets and the fears of a Chinese economic slowdown. Janet Yellen, the Fed’s chair, has repeatedly suggested that the Federal Reserve is expected to raise rates this year for the first time since 2006. Hence, there are only three meetings left this year during which the rates can be lifted, so a rate hike will almost surely take place sooner than later. The Goldman Sachs Group Inc. (NYSE:GS) sent a note to its clients last week claiming that historically, “quality” stocks have a propensity to outperform during the first three-month period after an initial rate hike. Moving back to what a quality stock represents, Goldman asserts that quality stocks have strong balance sheets, high returns on capital, low volatility, strong margins, high dividend yields, and stable growth in sales and earnings. In the following article, we will take a look at five consumer discretionary stocks that made Goldman’s top ten quality stocks list and will also look at how the hedge funds monitored by our team feel about these stocks.
Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 118% over the last 36 months and outperformed the S&P 500 Index by 60 percentage points (see the details here).
5. O’Reilly Automotive Inc (NASDAQ:ORLY)
Investors with Long Positions (as of June 30): 32
Aggregate Value of Investors’ Holdings (as of June 30): $1.49 Billion
Let’s start by looking at O’Reilly Automotive Inc (NASDAQ:ORLY), which is the second-best quality stock from the aforementioned list. The stock was owned by 28 hedge funds within our database at the end of the first quarter, when the value of their investments in the company stood at $1.56 billion, so there was mixed trading activity on the stock in the second quarter. The stock has been on a steady uptrend since the beginning of the year, gaining over 26% year-to-date. The specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories reckons that one of the key drivers of the demand for its products is the shrinking U.S unemployment rate. Considering that and the fact that consumer confidence has been strengthening, O’Reilly Automotive’s products have been in great demand this year. Mario Gabelli’s GAMCO Investors is among the bullish investors of O’Reilly Automotive Inc (NASDAQ:ORLY) within our database, owning 692,048 shares as of June 30.
4. TJX Companies Inc (NYSE:TJX)
Investors with Long Positions (as of June 30): 33
Aggregate Value of Investors’ Holdings (as of June 30): $1.28 Billion
TJX Companies Inc (NYSE:TJX) is the fifth-ranked consumer discretionary stock on Goldman’s top ten quality stocks list. Four more hedge funds observed by the Insider Monkey team added the stock to their portfolios during the latest quarter, while the value of their total stakes increased to $1.28 billion from $1.07 billion. TJX’s stock performance has been more or less stable throughout 2015, delivering a return of almost 4% since the beginning of the year. This off-price retailer of apparel has also been able to grow organically, reporting consolidated comparable store sales growth of 6% year-over-year. Cliff Asness’ AQR Capital Management reported owning 1.96 million shares of TJX Companies Inc (NYSE:TJX) in its latest 13F filing with the SEC.
3. Ross Stores Inc. (NASDAQ:ROST)
Investors with Long Positions (as of June 30): 35
Aggregate Value of Investors’ Holdings (as of June 30): $723.21 Million
The number of hedge funds with Ross Stores Inc. (NASDAQ:ROST) in their portfolios remained unchanged at 35 during the recent quarter, whereas the value of their total investment decreased from $824.71 million. The company that operates two brands of off-price retail apparel and home fashion stores has had a strong run over the last few months in terms of organic growth. Ross Stores reported same-store sales growth of 4% in the fiscal second quarter of 2016 that ended August 1. This growth is partially reflected in the company’s stock performance, as its shares have gained nearly 5% since the beginning of the year. John Tompkins’ Tyvor Capital initiated a 324,672-share position in Ross Stores Inc. (NASDAQ:ROST) during the recent quarter.
2. 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
Dollar Tree Inc. (NASDAQ:DLTR) is another quality stock pinpointed by Goldman Sachs, but one that has plummeted by 16% over the last month. Just recently, Credit Suisse downgraded Dollar Tree to “Underperform” from “Neutral” and reduced its price target to $60 from $70, suggesting that the company’s acquisition of Family Dollar bears some significant risks. In the meantime, the total number of hedge funds tracked by our team with positions in Dollar Tree decreased to 60 from 63 during the second quarter. Similarly, the value of these positions shrank from $3.77 billion over the same period. Phill Gross and Robert Atchinson’s Adage Capital Management more than doubled its stake in Dollar Tree Inc. (NASDAQ:DLTR) during the second quarter to 2.64 million shares.
1. Priceline Group Inc (NASDAQ:PCLN)
Investors with Long Positions (as of June 30): 71
Aggregate Value of Investors’ Holdings (as of June 30): $7.67 Billion
Priceline Group Inc (NASDAQ:PCLN) is the best quality stock from Goldman Sachs’ list, receiving a quality score of 95, and also the top-ranked stock on the list in terms of hedge fund ownership. There were 71 hedge funds tracked by Insider Monkey owning stakes in the company at the end of the second quarter, though this was down by 11 from the start of the period. However, the value of the total stakes augmented during this period to $7.67 billion from $7.46 billion. The shares of Priceline Group have delivered a relatively strong performance this year, and the recent broader market selloff has not stopped them from delivering a return of almost 13% year-to-date. Earlier this month, the company announced the acquisition of AS Digital, which is a leading provider of restaurant table and reservation management solutions. The freshly-acquired AS Digital will be fed into OpenTable’s operations, which was acquired last year, and is expected to accelerate OpenTable’s penetration into the Australian market. Tiger Global Management, founded by Chase Coleman, increased its stake in Priceline Group Inc (NASDAQ:PCLN) by 76% during the second quarter to 727,939 shares.
Disclosure: None
