Is Restoration Hardware Holdings Inc (RH) Going to Burn These Hedge Funds?

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Micron and Anadarko Petroleum, have not done well during the last 12 months ending in October due to various reasons. Nevertheless, the data show elite investors’ consensus picks have done well on average. The top 30 S&P 500 stocks among hedge funds at the end of September 2014 yielded an average return of 9.5% during the last four quarters ending in October and sixty three percent of these 30 stocks outperformed the market. S&P 500 Index returned only 5.2% during the same period and less than 49% of its constituents managed to beat this return. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at Restoration Hardware Holdings Inc (NYSE:RH) from the perspective of those elite funds.

Is Restoration Hardware Holdings Inc undervalued? The smart money is becoming less confident. The number of bullish hedge fund positions fell by 2 recently. RH was in 39 hedge funds’ portfolios at the end of the third quarter of 2015. There were 41 hedge funds in our database with RH holdings at the end of the previous quarter. At the end of this article we will also compare RH to other stocks, including Sally Beauty Holdings, Inc. (NYSE:SBH), Scotts Miracle-Gro Co (NYSE:SMG), and Ultragenyx Pharmaceutical Inc (NASDAQ:RARE) to get a better sense of its popularity.

According to most stock holders, hedge funds are perceived as worthless, old investment tools of years past. While there are over 8000 funds with their doors open today, We look at the bigwigs of this group, around 700 funds. These hedge fund managers direct the majority of the smart money’s total capital, and by observing their finest picks, Insider Monkey has spotted several investment strategies that have historically outrun the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points per year for a decade in their back tests.

Now, let’s take a peek at the latest action encompassing Restoration Hardware Holdings Inc (NYSE:RH).

What does the smart money think about Restoration Hardware Holdings Inc (NYSE:RH)?

At the end of the third quarter, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Chase Coleman’s Tiger Global Management LLC has the most valuable position in Restoration Hardware Holdings Inc (NYSE:RH), worth close to $298 million, accounting for 3.7% of its total 13F portfolio. On Tiger Global Management LLC’s heels is Miura Global Management, managed by Pasco Alfaro / Richard Tumure, which holds a $128.3 million position; the fund has 7% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors with similar optimism include Karthik Sarma’s SRS Investment Management and Steve Cohen’s Point72 Asset Management.

Since Restoration Hardware Holdings Inc (NYSE:RH) has witnessed declining sentiment from hedge fund managers, it’s easy to see that there is a sect of funds that slashed their positions entirely heading into Q4. At the top of the heap, Alexander Mitchell’s Scopus Asset Management said goodbye to the largest stake of the 700 funds monitored by Insider Monkey, valued at about $54.1 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund said goodbye to about $24.8 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 2 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Restoration Hardware Holdings Inc (NYSE:RH) but similarly valued. These stocks are Sally Beauty Holdings, Inc. (NYSE:SBH), Scotts Miracle-Gro Co (NYSE:SMG), Ultragenyx Pharmaceutical Inc (NASDAQ:RARE), and Validus Holdings, Ltd. (NYSE:VR). This group of stocks’ market caps match RH’s market cap.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $405 million. That figure was $973 million in RH’s case. Sally Beauty Holdings, Inc. (NYSE:SBH) is the most popular stock in this table with 28 funds reporting stakes. On the other hand Validus Holdings, Ltd. (NYSE:VR) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Restoration Hardware Holdings Inc (NYSE:RH) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.