We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether Toll Brothers Inc (NYSE:TOL) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.
Toll Brothers Inc (NYSE:TOL) has seen an increase in support from the world’s most elite money managers in recent months. TOL was in 31 hedge funds’ portfolios at the end of December. There were 24 hedge funds in our database with TOL positions at the end of the previous quarter. Our calculations also showed that TOL 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).
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 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. 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.
Steve Cohen of Point72 Asset Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. Keeping this in mind we’re going to take a gander at the recent hedge fund action encompassing Toll Brothers Inc (NYSE:TOL).
How are hedge funds trading Toll Brothers Inc (NYSE:TOL)?
At Q4’s end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 29% from the third quarter of 2019. On the other hand, there were a total of 28 hedge funds with a bullish position in TOL a year ago. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
Among these funds, Greenhaven Associates held the most valuable stake in Toll Brothers Inc (NYSE:TOL), which was worth $147 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $124.3 million worth of shares. Citadel Investment Group, Echo Street Capital Management, and Holocene Advisors 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 Greenhaven Associates allocated the biggest weight to Toll Brothers Inc (NYSE:TOL), around 3.28% of its 13F portfolio. Appian Way Asset Management is also relatively very bullish on the stock, designating 2.35 percent of its 13F equity portfolio to TOL.
With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, created the most outsized position in Toll Brothers Inc (NYSE:TOL). Marshall Wace LLP had $10.7 million invested in the company at the end of the quarter. Louis Bacon’s Moore Global Investments also made a $8.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Andrew Byington’s Appian Way Asset Management, Renaissance Technologies, and Steve Cohen’s Point72 Asset Management.
Let’s check out hedge fund activity in other stocks similar to Toll Brothers Inc (NYSE:TOL). We will take a look at The Howard Hughes Corporation (NYSE:HHC), Gold Fields Limited (NYSE:GFI), Acuity Brands, Inc. (NYSE:AYI), and Churchill Downs Incorporated (NASDAQ:CHDN). This group of stocks’ market valuations resemble TOL’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HHC | 25 | 671378 | -1 |
| GFI | 18 | 374752 | 1 |
| AYI | 29 | 822404 | 1 |
| CHDN | 32 | 599421 | 6 |
| Average | 26 | 616989 | 1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $617 million. That figure was $505 million in TOL’s case. Churchill Downs Incorporated (NASDAQ:CHDN) is the most popular stock in this table. On the other hand Gold Fields Limited (NYSE:GFI) is the least popular one with only 18 bullish hedge fund positions. Toll Brothers Inc (NYSE:TOL) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately TOL wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on TOL were disappointed as the stock returned -44.9% during the same time period 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 many of these stocks already outperformed the market so far this year.
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.
