Was The Smart Money Right About Crowding Into Five Below Inc (FIVE)?

In this article we will check out the progression of hedge fund sentiment towards Five Below Inc (NASDAQ:FIVE) and determine whether it 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.

Five Below Inc (NASDAQ:FIVE) was in 42 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. FIVE investors should pay attention to an increase in support from the world’s most elite money managers recently. There were 31 hedge funds in our database with FIVE positions at the end of the first quarter. Our calculations also showed that FIVE 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.

Richard Chilton of Chilton Investment Company

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 recent hedge fund action surrounding Five Below Inc (NASDAQ:FIVE).

How have hedgies been trading Five Below Inc (NASDAQ:FIVE)?

At second quarter’s end, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 35% from the first quarter of 2020. By comparison, 38 hedge funds held shares or bullish call options in FIVE 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.

Of the funds tracked by Insider Monkey, Aaron Cowen’s Suvretta Capital Management has the biggest position in Five Below Inc (NASDAQ:FIVE), worth close to $118.8 million, amounting to 2.6% of its total 13F portfolio. The second largest stake is held by Adage Capital Management, managed by Phill Gross and Robert Atchinson, which holds a $116.5 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors with similar optimism comprise Ken Griffin’s Citadel Investment Group, James Parsons’s Junto Capital Management and Jack Woodruff’s Candlestick Capital Management. In terms of the portfolio weights assigned to each position Pacifica Capital Investments allocated the biggest weight to Five Below Inc (NASDAQ:FIVE), around 20.38% of its 13F portfolio. MIK Capital is also relatively very bullish on the stock, earmarking 5.14 percent of its 13F equity portfolio to FIVE.

As industrywide interest jumped, key hedge funds have jumped into Five Below Inc (NASDAQ:FIVE) headfirst. Suvretta Capital Management, managed by Aaron Cowen, initiated the biggest position in Five Below Inc (NASDAQ:FIVE). Suvretta Capital Management had $118.8 million invested in the company at the end of the quarter. Phill Gross and Robert Atchinson’s Adage Capital Management also initiated a $116.5 million position during the quarter. The other funds with brand new FIVE positions are Richard Chilton’s Chilton Investment Company, Gregg Moskowitz’s Interval Partners, and Doug Silverman and Alexander Klabin’s Senator Investment Group.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Five Below Inc (NASDAQ:FIVE) but similarly valued. These stocks are NovoCure Limited (NASDAQ:NVCR), Enphase Energy Inc (NASDAQ:ENPH), Tandem Diabetes Care Inc (NASDAQ:TNDM), Allogene Therapeutics, Inc. (NASDAQ:ALLO), Globant SA (NYSE:GLOB), Huaneng Power International Inc (NYSE:HNP), and AMERCO (NASDAQ:UHAL). This group of stocks’ market valuations match FIVE’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.1 hedge funds with bullish positions and the average amount invested in these stocks was $343 million. That figure was $989 million in FIVE’s case. Enphase Energy Inc (NASDAQ:ENPH) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Five Below Inc (NASDAQ:FIVE) is more popular among hedge funds. Our overall hedge fund sentiment score for FIVE is 90. 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. 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 returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on FIVE as the stock returned 28.9% since the end of June (through 10/23) 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.

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