Hedge Funds Have Never Been This Bullish On Toll Brothers Inc (TOL)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Toll Brothers Inc (NYSE:TOL) and determine whether the smart money was really smart about this stock.

Toll Brothers Inc (NYSE:TOL) has seen an increase in enthusiasm from smart money of late. Toll Brothers Inc (NYSE:TOL) was in 39 hedge funds’ portfolios at the end of June. The all time high for this statistics is 34. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 20 hedge funds in our database with TOL positions at the end of the first quarter. Our calculations also showed that TOL 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.

Ken Heebner of Capital Growth Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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 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. Now let’s check out the key hedge fund action regarding Toll Brothers Inc (NYSE:TOL).

How have hedgies been trading Toll Brothers Inc (NYSE:TOL)?

At the end of the second quarter, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 95% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in TOL a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Greenhaven Associates held the most valuable stake in Toll Brothers Inc (NYSE:TOL), which was worth $165.3 million at the end of the third quarter. On the second spot was Millennium Management which amassed $38.4 million worth of shares. Citadel Investment Group, Echo Street Capital Management, and Capital Growth Management 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 Greenhaven Associates allocated the biggest weight to Toll Brothers Inc (NYSE:TOL), around 3.66% of its 13F portfolio. Capital Growth Management is also relatively very bullish on the stock, earmarking 2.92 percent of its 13F equity portfolio to TOL.

As one would reasonably expect, some big names were leading the bulls’ herd. Capital Growth Management, managed by Ken Heebner, established the most outsized position in Toll Brothers Inc (NYSE:TOL). Capital Growth Management had $25.1 million invested in the company at the end of the quarter. Robert Bishop’s Impala Asset Management also initiated a $16.7 million position during the quarter. The following funds were also among the new TOL investors: Matthew Hulsizer’s PEAK6 Capital Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s check out hedge fund activity in other stocks similar to Toll Brothers Inc (NYSE:TOL). We will take a look at Essent Group Ltd (NYSE:ESNT), ONE Gas Inc (NYSE:OGS), Nevro Corp (NYSE:NVRO), Cameco Corporation (NYSE:CCJ), Cabot Microelectronics Corporation (NASDAQ:CCMP), Qualys Inc (NASDAQ:QLYS), and MSC Industrial Direct Co Inc (NYSE:MSM). This group of stocks’ market valuations are closest to TOL’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.6 hedge funds with bullish positions and the average amount invested in these stocks was $299 million. That figure was $428 million in TOL’s case. Nevro Corp (NYSE:NVRO) is the most popular stock in this table. On the other hand ONE Gas Inc (NYSE:OGS) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Toll Brothers Inc (NYSE:TOL) is more popular among hedge funds. Our overall hedge fund sentiment score for TOL 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 returned 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on TOL as the stock returned 30% since the end of June 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.

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