The overall characteristic of the hedge fund industry has changed dramatically over the last several decades. While the catch phrase “hedge fund” continues to draw attention and captivate the investing public, many are beginning to question whether hedge funds can outperform the broader market going forward.
Large hedge funds significantly outperformed the S&P 500 index from 1986–1996, earning a 1,400% return while the S&P returned only 400% in the same time frame. From 1997–2001, the average fund performed slightly better with a 61.5% return compared to 53.4% for the S&P.
Following the Dot-Com era, the hedge fund industry matured considerably. Institutional investors such as university endowments and defined benefit pensions began to invest, raising the size of assets from the billions to trillions during 2001–2010. Since 2010, the performance by hedge funds has been mediocre at best.
The underperformance in recent years has led some analysts to believe that it is better for the wealthy to follow the actions of hedge funds rather than invest directly with them. Furthermore, the rapid and equal dissemination of information following Regulation FD (fair disclosure) has virtually eliminated any advantage held by large investors in the past.
Online investment communities such as The Motley Fool can help you identify which stocks are owned by hedge funds in order to capitalize on the trend. Here are three stocks I’m watching that are well-represented by hedge funds:
Natural and organic food company
Reports on Monday, June 10 after market close; EPS $0.28 / Revenue $50.7M
The Berkeley, CA headquartered Annies Inc (NYSE:BNNY)’s has been a hedge fund favorite since it went public in March 2012. While shares have risen modestly since the IPO, Annie’s selected the right time to become a public company as demand for natural and organic foods continues to soar. Sales at Annies Inc (NYSE:BNNY)’s have grown 17.6% in the last 12 months, a respectable figure for the natural foods industry.
For the upcoming quarter, investors will be looking for a reacceleration in sales following a frozen pizza recall earlier this year. Annies Inc (NYSE:BNNY)’s issued a voluntary recall of its frozen pizza in January, stating that metal fragments could be present in the dough.
Investors appear to be looking past the news, as Annies Inc (NYSE:BNNY)’s sold $140 million worth of new stock back in March. The $40.00 per share offering was met with strong demand. All in all, I believe Annies Inc (NYSE:BNNY)’s will continue to benefit from a growing demand for natural foods. New store openings at Whole Foods Market, Inc. (NASDAQ:WFM) and The Fresh Market Inc (NASDAQ:TFM) as well as an increased presence at traditional grocers should result in higher sales.
Tax preparation company
Reports on Wednesday, June 12 after market close; EPS $2.60 / Revenue $2.27B
Shares of H&R Block, Inc. (NYSE:HRB) have risen more than 52% so far in 2013 as the company has become a hedge fund favorite. Who knew that tax preparation is such a profitable business, especially with a free tax filing and consultation?
The 2013 tax season began on a weak note, as the IRS delayed the start date to January 30 following the fiscal cliff in Washington. Nonetheless, investors believe the shorter tax season will result in pent-up demand for upcoming fourth quarter results.
H&R Block, Inc. (NYSE:HRB)’s fourth quarter began on February 1 and ended on April 30. I expect to see strong demand for tax filings from the first date to the last, given the missing week to start tax season.
Competitor Intuit Inc. (NASDAQ:INTU) reported earnings on May 21 after citing a “tough tax season” which caused the company to lower its earnings and revenue guidance. Analysts originally expected that Intuit’s TurboTax would take market share from H&R Block, Inc. (NYSE:HRB), however all indications point to stiff resistance from Intuit’s smaller competitor.
H&R Block, Inc. (NYSE:HRB) has a market capitalization of $7.8 billion, while Intuit has a market cap of more than $17 billion.
Hedge funds remain bullish on H&R Block, Inc. (NYSE:HRB) ahead of the earnings release. According to the most recent insider data, Steve Mandel’s Lone Pine Capital maintains a 2.48% ownership in the tax preparation company.
Yoga apparel and athleticwear
Reports on Monday, June 10 after market close; EPS $0.30 / Revenue $341.2M
Widely-owned among the hedge fund community, Lululemon Athletica inc. (NASDAQ:LULU) is perceived as one of the best growth stock opportunities in the market today.
The company gained publicity in March when it announced its Luon yoga pants were too sheer, forcing a recall on three styles of pants that had been sold. Lululemon Athletica inc. (NASDAQ:LULU) has now re-introduced two of the styles to the delight of customers and news media alike. Analysts are applauding the response of Lululemon Athletica inc. (NASDAQ:LULU) to the incident — while initially viewed as a negative development Lululemon Athletica inc. (NASDAQ:LULU) leveraged the opportunity as free advertising and gained new customers in the process.
For upcoming first quarter results, Wall Street channel checks indicate that Lululemon Athletica inc. (NASDAQ:LULU) is likely to meet or exceed the high end of guidance. A number of investment firms have raised their price target on the stock ahead of earnings. Analysts at UBS raised their target to $90 from a previous $77, while Canaccord Genuity raised their target to $92 from a previous $87.
Foolish takeaway
While the jury remains out if hedge funds can outperform the market in the post-modern era, readers can benefit by studying the actions of large funds and riding on their coattails.
In particular, Annie’s, H&R Block, Inc. (NYSE:HRB), and Lululemon Athletica inc. (NASDAQ:LULU) appear well-positioned ahead of upcoming reports. I believe all three stocks will move higher for the rest of 2013.
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John Macris has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Three Hedge Fund Favorites With Upcoming Reports originally appeared on Fool.com is written by John Macris.
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