Lululemon Athletica inc. (LULU) vs. Hedge Fund Favorites in 2019

Last year’s fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Lululemon Athletica inc. (NASDAQ:LULU) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.

Is Lululemon Athletica inc. (NASDAQ:LULU) going to take off soon? Investors who are in the know are becoming less confident. The number of long hedge fund positions went down by 3 lately. Our calculations also showed that LULU isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

David E. Shaw of D.E. Shaw

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now let’s take a look at the recent hedge fund action surrounding Lululemon Athletica inc. (NASDAQ:LULU).

Hedge fund activity in Lululemon Athletica inc. (NASDAQ:LULU)

At the end of the third quarter, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. By comparison, 45 hedge funds held shares or bullish call options in LULU a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Lululemon Athletica inc. (NASDAQ:LULU) was held by D E Shaw, which reported holding $227.5 million worth of stock at the end of September. It was followed by Melvin Capital Management with a $154 million position. Other investors bullish on the company included AQR Capital Management, Arrowstreet Capital, and Renaissance Technologies. In terms of the portfolio weights assigned to each position North Fourth Asset Management allocated the biggest weight to Lululemon Athletica inc. (NASDAQ:LULU), around 4.09% of its 13F portfolio. Stormborn Capital Management is also relatively very bullish on the stock, earmarking 3.04 percent of its 13F equity portfolio to LULU.

Due to the fact that Lululemon Athletica inc. (NASDAQ:LULU) has experienced declining sentiment from hedge fund managers, it’s safe to say that there is a sect of fund managers who sold off their positions entirely last quarter. Interestingly, Leon Shaulov’s Maplelane Capital sold off the biggest stake of the “upper crust” of funds followed by Insider Monkey, worth an estimated $21.6 million in stock. Simon Sadler’s fund, Segantii Capital, also sold off its stock, about $11.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 3 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Lululemon Athletica inc. (NASDAQ:LULU) but similarly valued. We will take a look at Willis Towers Watson Public Limited Company (NASDAQ:WLTW), FleetCor Technologies, Inc. (NYSE:FLT), Realty Income Corporation (NYSE:O), and DTE Energy Company (NYSE:DTE). All of these stocks’ market caps are closest to LULU’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $1225 million. That figure was $1527 million in LULU’s case. FleetCor Technologies, Inc. (NYSE:FLT) is the most popular stock in this table. On the other hand Realty Income Corporation (NYSE:O) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Lululemon Athletica inc. (NASDAQ:LULU) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on LULU as the stock returned 87.6% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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.