Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Sally Beauty Holdings, Inc. (NYSE:SBH).
Sally Beauty Holdings, Inc. (NYSE:SBH) shareholders have witnessed an increase in support from the world’s most elite money managers lately. SBH was in 27 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 24 hedge funds in our database with SBH positions at the end of the previous quarter. Our calculations also showed that SBH 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).
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.
Philippe Laffont of Coatue Management
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 take a peek at the fresh hedge fund action encompassing Sally Beauty Holdings, Inc. (NYSE:SBH).
What have hedge funds been doing with Sally Beauty Holdings, Inc. (NYSE:SBH)?
At the end of the fourth quarter, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SBH over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
Among these funds, Arrowstreet Capital held the most valuable stake in Sally Beauty Holdings, Inc. (NYSE:SBH), which was worth $59.7 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $44.3 million worth of shares. D E Shaw, GLG Partners, and GAMCO Investors 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 Prentice Capital Management allocated the biggest weight to Sally Beauty Holdings, Inc. (NYSE:SBH), around 4.27% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, dishing out 0.65 percent of its 13F equity portfolio to SBH.
As one would reasonably expect, some big names were leading the bulls’ herd. Citadel Investment Group, managed by Ken Griffin, established the most valuable position in Sally Beauty Holdings, Inc. (NYSE:SBH). Citadel Investment Group had $11.1 million invested in the company at the end of the quarter. Michael Zimmerman’s Prentice Capital Management also made a $9.1 million investment in the stock during the quarter. The other funds with brand new SBH positions are Renaissance Technologies, David Harding’s Winton Capital Management, and Michael Kharitonov and Jon David McAuliffe’s Voleon Capital.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Sally Beauty Holdings, Inc. (NYSE:SBH) but similarly valued. These stocks are Insmed Incorporated (NASDAQ:INSM), Noah Holdings Limited (NYSE:NOAH), Terex Corporation (NYSE:TEX), and Heron Therapeutics Inc (NASDAQ:HRTX). This group of stocks’ market valuations match SBH’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| INSM | 25 | 489521 | 2 |
| NOAH | 15 | 355694 | -6 |
| TEX | 22 | 291253 | 3 |
| HRTX | 19 | 497040 | 3 |
| Average | 20.25 | 408377 | 0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $408 million. That figure was $206 million in SBH’s case. Insmed Incorporated (NASDAQ:INSM) is the most popular stock in this table. On the other hand Noah Holdings Limited (NYSE:NOAH) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Sally Beauty Holdings, Inc. (NYSE:SBH) is more popular among hedge funds. 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 13.0% in 2020 through April 6th and still beat the market by 4.2 percentage points. Unfortunately SBH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SBH were disappointed as the stock returned -56% during the three months of 2020 (through April 6th) 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 most of these stocks already outperformed the market in 2020.
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.
