Was The Smart Money Right About Constellation Brands, Inc. (STZ)?

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 Constellation Brands, Inc. (NYSE:STZ).

Constellation Brands, Inc. (NYSE:STZ) has experienced an increase in activity from the world’s largest hedge funds of late. Constellation Brands, Inc. (NYSE:STZ) was in 53 hedge funds’ portfolios at the end of June. The all time high for this statistics is 71. There were 50 hedge funds in our database with STZ holdings at the end of March. Our calculations also showed that STZ isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 56 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.

Michael Lowenstein of Kensico Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s check out the new hedge fund action encompassing Constellation Brands, Inc. (NYSE:STZ).

How have hedgies been trading Constellation Brands, Inc. (NYSE:STZ)?

At the end of June, a total of 53 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from the previous quarter. On the other hand, there were a total of 38 hedge funds with a bullish position in STZ 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 Constellation Brands, Inc. (NYSE:STZ) was held by Kensico Capital, which reported holding $768.4 million worth of stock at the end of September. It was followed by Palestra Capital Management with a $223.9 million position. Other investors bullish on the company included Two Creeks Capital Management, Gates Capital Management, and Candlestick Capital Management. In terms of the portfolio weights assigned to each position Kensico Capital allocated the biggest weight to Constellation Brands, Inc. (NYSE:STZ), around 16.12% of its 13F portfolio. BlueDrive Global Investors is also relatively very bullish on the stock, setting aside 10.05 percent of its 13F equity portfolio to STZ.

As aggregate interest increased, key money managers were breaking ground themselves. BlueDrive Global Investors, managed by Oscar Hattink, assembled the largest position in Constellation Brands, Inc. (NYSE:STZ). BlueDrive Global Investors had $29.7 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also made a $20.5 million investment in the stock during the quarter. The following funds were also among the new STZ investors: Matthew Hulsizer’s PEAK6 Capital Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Greg Poole’s Echo Street Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Constellation Brands, Inc. (NYSE:STZ). We will take a look at Thomson Reuters Corporation (NYSE:TRI), Banco Bradesco SA (NYSE:BBD), Public Storage (NYSE:PSA), SBA Communications Corporation (NASDAQ:SBAC), Metlife Inc (NYSE:MET), Xcel Energy Inc (NASDAQ:XEL), and HCA Healthcare Inc (NYSE:HCA). This group of stocks’ market valuations are similar to STZ’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.9 hedge funds with bullish positions and the average amount invested in these stocks was $1006 million. That figure was $1653 million in STZ’s case. HCA Healthcare Inc (NYSE:HCA) is the most popular stock in this table. On the other hand Banco Bradesco SA (NYSE:BBD) is the least popular one with only 18 bullish hedge fund positions. Constellation Brands, Inc. (NYSE:STZ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for STZ is 63.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately STZ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on STZ were disappointed as the stock returned 3% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.