Macy’s, Walmart: Hedge Funds Are Bullish On These 5 Retailers

The retail sector has not had the best of years, with indexes like the SPDR S&P Retail (ETF) (NYSEARCA:XRT) up by 0.65% since the start of the year, and the PowerShares Dynamic Retail (ETF) (NYSEARCA:PMR) down by more than 3.7% year-to-date. Over the same period, the S&P 500 index has gained almost 5%.

Despite the feebleness, hedge funds continued to remain relatively bullish on several top retailers. In this article, we’ll take a look at the five most popular retail stocks among the group of successful hedge funds that we track and see how they were trading those stocks leading into the summer quarter.

At Insider Monkey, we track around 750 hedge funds and other institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on, can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see the details here).

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#5. Costco Wholesale Corporation (NASDAQ:COST)

– Number of Hedge Fund Shareholders (as of June 30): 39

– Total Value of Hedge Funds’ Holdings (as of June 30): $1.62 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 2.4%

The number of hedge funds in our database long Costco Wholesale Corporation (NASDAQ:COST) declined by 9.3% during the second quarter, as the stock plummeted, hitting a low of around $141 in mid-May. Among those that stayed were Warren Buffett’s Berkshire Hathaway, with 4.33 million shares worth $680.5 million, and Richard Chilton’s Chilton Investment Company, with 743,375 shares.

Costco Wholesale Corporation (NASDAQ:COST), the second-largest retailer in the U.S., recently reported that its net sales grew by 2.3% year-over-year in August, to $8.9 billion, even though U.S. comps were flat. The stock currently pays out a quarterly dividend of $0.45, which equates to a 1.19% annualized yield. Although smaller than the dividend payments of many of its peers, Costco’s shareholder payments are attractive given its tendency to make special one-time payments to investors. Over the last three years, shareholders have received about $7 billion in payments from the company.

#4. Dollar General Corp. (NYSE:DG)

– Number of Hedge Fund Shareholders (as of June 30): 53

– Total Value of Hedge Funds’ Holdings (as of June 30): $1.18 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 4.4%

Same as a quarter earlier, 53 funds in our database held stakes in Dollar General Corp. (NYSE:DG) as of June 30. Among them was Martin D. Sass’ MD Sass, with 624,168 shares valued at $58.6 million at the end of June, and Jim Simons’ Renaissance Technologies, with 522,900 shares.

Shares of Dollar General Corp. (NYSE:DG), which gained more than 9% over the second quarter, have lost more than 24% in the third quarter, mostly on the back of a second quarter top- and bottom-line miss. EPS of $1.08 and revenue of $5.39 billion missed estimates by $0.01 and $110 million, respectively, which led to downgrades from a slew of analysts in late-August. Credit Suisse and Deutsche Bank each slashed their price targets on Dollar General by $15, to $80 and $84 respectively.

We’ll see how hedge funds traded their three favorite retailers during the second quarter on the next page.

#3. Macy’s Inc (NYSE:M)

– Number of Hedge Fund Shareholders (as of June 30): 57

– Total Value of Hedge Funds’ Holdings (as of June 30): $1.14 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 11%

The number of funds with long exposure to Macy’s Inc (NYSE:M) inched up by two to 57 during the second quarter. Particularly bullish was Clint Carlson’s Carlson Capital, which boosted its stake by 547% over the period, to 2.08 million shares worth almost $70 million. Jeffrey Smith’s Starboard Value was also a fan of the clothing retailer, holding 2.36 million shares in it on June 30.

Even though Macy’s Inc (NYSE:M) has gained almost 6.5% since the end of the second quarter, its valuation of roughly 14-times trailing earnings is relatively par for the course in relation to many of its peers. Nonetheless, the stock carries a 4.26% annualized dividend yield, above its industry’s average. Shares of Macy’s fell by 1.44% on Friday, likely driven by the news that the company is considering an expansion of its partnership with Starbucks Corporation (NASDAQ:SBUX), which currently has locations at 49 of the retailer’s stores.

#2. Wal-Mart Stores, Inc. (NYSE:WMT)

– Number of Hedge Fund Shareholders (as of June 30): 58

– Total Value of Hedge Funds’ Holdings (as of June 30): $6.86 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 3%

After a 7.4% increase in hedge fund support, Wal-Mart Stores, Inc. (NYSE:WMT) counted 58 backers in our database, holding almost $7 billion worth of its stock. Newcomers included Gabriel Plotkin’s Melvin Capital Management, which acquired 1.05 million shares or $76.6 million in stock in the second quarter, and Dmitry Balyasny’s Balyasny Asset Management, which bought 1.02 million shares between April and June.

Shares of Wal-Mart Stores, Inc. (NYSE:WMT), the number one retailer in the U.S., have spiked by more than 14.6% since the beginning of the year, but have lost almost 3% in the third quarter. Included in that was a 2.08% decline on Friday, after the company announced that it would stop selling Egyptian cotton sheets made by Welspun India, and offer customers that had already purchased them a full refund, after an investigation found that Welspun could not assure the products’ legitimacy. Target Corporation (NYSE:TGT) also announced in August that it was removing Welspun products from its stores and cutting ties with the company.

#1. Dollar Tree, Inc. (NASDAQ:DLTR)

– Number of Hedge Fund Shareholders (as of June 30): 64

– Total Value of Hedge Funds’ Holdings (as of June 30): $4.95 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 22.3%

Dollar Tree, Inc. (NASDAQ:DLTR) was the most popular brick-and-mortar retailer among the funds that we track, with 64 funds in our database holding 22.3% of its stock as of June 30. Notable investors included Charles Akre’s Akre Capital Management, with 4.18 million shares worth $403.1 million, and Ken Griffin’s Citadel Advisors, which held 2.42 million shares after boosting the size of its holding by 52% during the second quarter.

Over the second quarter, Dollar Tree, Inc. (NASDAQ:DLTR) gained more than 13.25%, even though its first quarter results missed expectations on the revenue front. The third quarter, however, saw it give up those gains, as it has tumbled by 13.55% due to a top- and bottom-line miss with its second quarter results. EPS of $0.72 and revenue of $5 billion missed the Street’s consensus marks by $0.01 and $90 million, respectively, with the discount retailer potentially having been impacted by a reduction in food stamp coverage in some states.

Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned in this article.