Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example the Standard and Poor’s 500 Total Return Index ETFs returned 27.5% (including dividend payments) through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of nearly 37.4% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Floor & Decor Holdings, Inc. (NYSE:FND).
Floor & Decor Holdings, Inc. (NYSE:FND) was in 23 hedge funds’ portfolios at the end of the third quarter of 2019. FND investors should be aware of an increase in support from the world’s most elite money managers of late. There were 21 hedge funds in our database with FND holdings at the end of the previous quarter. Our calculations also showed that FND isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
If you’d ask most shareholders, hedge funds are assumed to be slow, old investment vehicles of years past. While there are more than 8000 funds trading at the moment, Our researchers choose to focus on the top tier of this club, approximately 750 funds. Most estimates calculate that this group of people preside over bulk of the hedge fund industry’s total capital, and by shadowing their best investments, Insider Monkey has found several investment strategies that have historically outrun the broader indices. Insider Monkey’s flagship short hedge fund strategy exceeded the S&P 500 short ETFs by around 20 percentage points annually since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .
Paul Marshall of Marshall Wace
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the fresh hedge fund action encompassing Floor & Decor Holdings, Inc. (NYSE:FND).
What does smart money think about Floor & Decor Holdings, Inc. (NYSE:FND)?
At Q3’s end, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of 10% from the second quarter of 2019. On the other hand, there were a total of 25 hedge funds with a bullish position in FND 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, Joho Capital held the most valuable stake in Floor & Decor Holdings, Inc. (NYSE:FND), which was worth $176.2 million at the end of the third quarter. On the second spot was Two Creeks Capital Management which amassed $112.4 million worth of shares. Marshall Wace, Arrowstreet Capital, and Citadel Investment Group 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 Joho Capital allocated the biggest weight to Floor & Decor Holdings, Inc. (NYSE:FND), around 31.12% of its 13F portfolio. Two Creeks Capital Management is also relatively very bullish on the stock, dishing out 7.35 percent of its 13F equity portfolio to FND.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the largest position in Floor & Decor Holdings, Inc. (NYSE:FND). Arrowstreet Capital had $23.8 million invested in the company at the end of the quarter. Charles Clough’s Clough Capital Partners also made a $9.8 million investment in the stock during the quarter. The other funds with brand new FND positions are Jay Genzer’s Thames Capital Management, Principal Global Investors’s Columbus Circle Investors, and Richard Driehaus’s Driehaus Capital.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Floor & Decor Holdings, Inc. (NYSE:FND) but similarly valued. We will take a look at Empire State Realty Trust Inc (NYSE:ESRT), Liberty Global plc (NASDAQ:LBTYA), Horizon Therapeutics Public Limited Company (NASDAQ:HZNP), and Avalara, Inc. (NYSE:AVLR). This group of stocks’ market values match FND’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ESRT | 9 | 102681 | -3 |
| LBTYA | 27 | 1291972 | 0 |
| HZNP | 32 | 1379525 | -2 |
| AVLR | 44 | 1102762 | 4 |
| Average | 28 | 969235 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $969 million. That figure was $472 million in FND’s case. Avalara, Inc. (NYSE:AVLR) is the most popular stock in this table. On the other hand Empire State Realty Trust Inc (NYSE:ESRT) is the least popular one with only 9 bullish hedge fund positions. Floor & Decor Holdings, Inc. (NYSE:FND) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately FND wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); FND investors were disappointed as the stock returned -6.1% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
