Was The Smart Money Right About RH (RH)?

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 RH (NYSE:RH).

Is RH (NYSE:RH) a first-rate investment today? Investors who are in the know were taking an optimistic view. The number of long hedge fund positions advanced by 10 recently. RH (NYSE:RH) was in 40 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that RH 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). There were 30 hedge funds in our database with RH positions at the end of the first quarter.

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

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Daniel Sundheim of D1 Capital Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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. Now we’re going to take a look at the new hedge fund action surrounding RH (NYSE:RH).

Hedge fund activity in RH (NYSE:RH)

At Q2’s end, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in RH 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.

The largest stake in RH (NYSE:RH) was held by Berkshire Hathaway, which reported holding $425.2 million worth of stock at the end of June. It was followed by Two Sigma Advisors with a $89.6 million position. Other investors bullish on the company included D E Shaw, Citadel Investment Group, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position MIG Capital allocated the biggest weight to RH (NYSE:RH), around 5.5% of its 13F portfolio. Rip Road Capital is also relatively very bullish on the stock, setting aside 5.06 percent of its 13F equity portfolio to RH.

Now, specific money managers have been driving this bullishness. D1 Capital Partners, managed by Daniel Sundheim, established the most outsized position in RH (NYSE:RH). D1 Capital Partners had $49.8 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $16.8 million position during the quarter. The other funds with brand new RH positions are Clint Carlson’s Carlson Capital, Brad Stephens’s Six Columns Capital, and Louis Bacon’s Moore Global Investments.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as RH (NYSE:RH) but similarly valued. These stocks are KT Corporation (NYSE:KT), SiteOne Landscape Supply, Inc. (NYSE:SITE), Helen of Troy Limited (NASDAQ:HELE), National Oilwell Varco, Inc. (NYSE:NOV), Everbridge, Inc. (NASDAQ:EVBG), The Mosaic Company (NYSE:MOS), and Kemper Corporation (NYSE:KMPR). This group of stocks’ market values resemble RH’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.4 hedge funds with bullish positions and the average amount invested in these stocks was $379 million. That figure was $1040 million in RH’s case. Everbridge, Inc. (NASDAQ:EVBG) is the most popular stock in this table. On the other hand KT Corporation (NYSE:KT) is the least popular one with only 12 bullish hedge fund positions. RH (NYSE:RH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for RH is 85.2. 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 gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on RH as the stock returned 34.7% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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