Hedge Funds Keep Buying HD Supply Holdings Inc (HDS)

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 HD Supply Holdings Inc (NASDAQ:HDS) and determine whether hedge funds had an edge regarding this stock.

Is HD Supply Holdings Inc (NASDAQ:HDS) a good investment today? Hedge funds were getting more bullish. The number of bullish hedge fund positions moved up by 4 lately. HD Supply Holdings Inc (NASDAQ:HDS) was in 44 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 55. Our calculations also showed that HDS 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). There were 40 hedge funds in our database with HDS positions at the end of the first quarter.

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.

Ray Dalio of Bridgewater Associates

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. 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. 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 take a gander at the recent hedge fund action surrounding HD Supply Holdings Inc (NASDAQ:HDS).

What have hedge funds been doing with HD Supply Holdings Inc (NASDAQ:HDS)?

At second quarter’s end, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards HDS over the last 20 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

The largest stake in HD Supply Holdings Inc (NASDAQ:HDS) was held by Baupost Group, which reported holding $229.4 million worth of stock at the end of September. It was followed by Iridian Asset Management with a $145.4 million position. Other investors bullish on the company included Eminence Capital, D E Shaw, and Lakewood Capital Management. In terms of the portfolio weights assigned to each position Impactive Capital allocated the biggest weight to HD Supply Holdings Inc (NASDAQ:HDS), around 13.06% of its 13F portfolio. Marathon Partners is also relatively very bullish on the stock, earmarking 8.93 percent of its 13F equity portfolio to HDS.

With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Lakewood Capital Management, managed by Anthony Bozza, established the largest position in HD Supply Holdings Inc (NASDAQ:HDS). Lakewood Capital Management had $52.9 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also made a $4.3 million investment in the stock during the quarter. The other funds with new positions in the stock are George McCabe’s Portolan Capital Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Ray Dalio’s Bridgewater Associates.

Let’s check out hedge fund activity in other stocks similar to HD Supply Holdings Inc (NASDAQ:HDS). We will take a look at Apartment Investment and Management Co. (NYSE:AIV), AppFolio Inc (NASDAQ:APPF), Zions Bancorporation, National Association (NASDAQ:ZION), Ingredion Incorporated (NYSE:INGR), Kimco Realty Corp (NYSE:KIM), Teck Resources Ltd (NYSE:TECK), and SolarWinds Corporation (NYSE:SWI). This group of stocks’ market valuations are similar to HDS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.3 hedge funds with bullish positions and the average amount invested in these stocks was $578 million. That figure was $993 million in HDS’s case. Kimco Realty Corp (NYSE:KIM) is the most popular stock in this table. On the other hand SolarWinds Corporation (NYSE:SWI) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks HD Supply Holdings Inc (NASDAQ:HDS) is more popular among hedge funds. Our overall hedge fund sentiment score for HDS is 83. 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 managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on HDS, though not to the same extent, as the stock returned 14.5% since the end of June and outperformed the market as well.

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