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 (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Universal Forest Products, Inc. (NASDAQ:UFPI) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Universal Forest Products, Inc. (NASDAQ:UFPI) was in 27 hedge funds’ portfolios at the end of December. UFPI investors should pay attention to an increase in enthusiasm from smart money of late. There were 22 hedge funds in our database with UFPI positions at the end of the previous quarter. Our calculations also showed that UFPI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article 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.
Israel Englander of Millennium Management
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. Now we’re going to analyze the recent hedge fund action encompassing Universal Forest Products, Inc. (NASDAQ:UFPI).
What have hedge funds been doing with Universal Forest Products, Inc. (NASDAQ:UFPI)?
Heading into the first quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 23% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards UFPI over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).
More specifically, GLG Partners was the largest shareholder of Universal Forest Products, Inc. (NASDAQ:UFPI), with a stake worth $18.1 million reported as of the end of September. Trailing GLG Partners was Arrowstreet Capital, which amassed a stake valued at $17.3 million. AQR Capital Management, Millennium Management, and Renaissance Technologies 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 SG Capital Management allocated the biggest weight to Universal Forest Products, Inc. (NASDAQ:UFPI), around 1.42% of its 13F portfolio. Zebra Capital Management is also relatively very bullish on the stock, dishing out 0.82 percent of its 13F equity portfolio to UFPI.
As industrywide interest jumped, key hedge funds were breaking ground themselves. D E Shaw, managed by D. E. Shaw, created the most valuable position in Universal Forest Products, Inc. (NASDAQ:UFPI). D E Shaw had $2 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe’s Voleon Capital also initiated a $1.5 million position during the quarter. The other funds with brand new UFPI positions are Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, and Phill Gross and Robert Atchinson’s Adage Capital Management.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Universal Forest Products, Inc. (NASDAQ:UFPI) but similarly valued. These stocks are NovaGold Resources Inc. (NYSE:NG), Evercore Inc. (NYSE:EVR), Inovalon Holdings Inc (NASDAQ:INOV), and Telephone & Data Systems, Inc. (NYSE:TDS). This group of stocks’ market caps are similar to UFPI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NG | 16 | 352933 | 0 |
| EVR | 32 | 316470 | -1 |
| INOV | 16 | 82039 | 5 |
| TDS | 22 | 269898 | -7 |
| Average | 21.5 | 255335 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $255 million. That figure was $102 million in UFPI’s case. Evercore Inc. (NYSE:EVR) is the most popular stock in this table. On the other hand NovaGold Resources Inc. (NYSE:NG) is the least popular one with only 16 bullish hedge fund positions. Universal Forest Products, Inc. (NASDAQ:UFPI) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately UFPI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on UFPI were disappointed as the stock returned -25.2% during the same time period 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 many of these stocks already outperformed the market so far this year.
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.
