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 (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Nordstrom, Inc. (NYSE:JWN).
Is Nordstrom, Inc. (NYSE:JWN) an exceptional stock to buy now? Prominent investors are getting more optimistic. The number of long hedge fund bets rose by 7 lately. Our calculations also showed that JWN 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). JWN was in 30 hedge funds’ portfolios at the end of December. There were 23 hedge funds in our database with JWN positions at the end of the previous quarter.
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.
Richard Chilton of Chilton Investment Company
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. With all of this in mind we’re going to check out the fresh hedge fund action surrounding Nordstrom, Inc. (NYSE:JWN).
How are hedge funds trading Nordstrom, Inc. (NYSE:JWN)?
At the end of the fourth quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 30% from the third quarter of 2019. On the other hand, there were a total of 23 hedge funds with a bullish position in JWN a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to Insider Monkey’s hedge fund database, Citadel Investment Group, managed by Ken Griffin, holds the number one position in Nordstrom, Inc. (NYSE:JWN). Citadel Investment Group has a $42.8 million call position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by Two Sigma Advisors, managed by John Overdeck and David Siegel, which holds a $24.7 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Some other peers with similar optimism consist of John W. Rogers’s Ariel Investments, Matthew Hulsizer’s PEAK6 Capital Management and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position Kehrs Ridge Capital allocated the biggest weight to Nordstrom, Inc. (NYSE:JWN), around 3.43% of its 13F portfolio. Stamos Capital is also relatively very bullish on the stock, dishing out 3.21 percent of its 13F equity portfolio to JWN.
Now, key money managers have jumped into Nordstrom, Inc. (NYSE:JWN) headfirst. Kehrs Ridge Capital, managed by Brian Scudieri, initiated the most valuable position in Nordstrom, Inc. (NYSE:JWN). Kehrs Ridge Capital had $8.2 million invested in the company at the end of the quarter. Richard Chilton’s Chilton Investment Company also initiated a $7.1 million position during the quarter. The following funds were also among the new JWN investors: Michael Gelband’s ExodusPoint Capital, Anthony Joseph Vaccarino’s North Fourth Asset Management, and Donald Sussman’s Paloma Partners.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Nordstrom, Inc. (NYSE:JWN) but similarly valued. We will take a look at Jabil Inc. (NYSE:JBL), Pegasystems Inc. (NASDAQ:PEGA), Generac Holdings Inc. (NYSE:GNRC), and IAA, Inc. (NYSE:IAA). This group of stocks’ market caps are closest to JWN’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| JBL | 34 | 641843 | 0 |
| PEGA | 25 | 1051106 | -1 |
| GNRC | 32 | 369028 | -1 |
| IAA | 37 | 1058182 | 5 |
| Average | 32 | 780040 | 0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $780 million. That figure was $160 million in JWN’s case. IAA, Inc. (NYSE:IAA) is the most popular stock in this table. On the other hand Pegasystems Inc. (NASDAQ:PEGA) is the least popular one with only 25 bullish hedge fund positions. Nordstrom, Inc. (NYSE:JWN) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately JWN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); JWN investors were disappointed as the stock returned -57.5% 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 most of these stocks already outperformed the market in Q1.
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.
