Was The Smart Money Right About Selling Lululemon Athletica inc. (LULU)?

In this article we will check out the progression of hedge fund sentiment towards Lululemon Athletica inc. (NASDAQ:LULU) 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.

Lululemon Athletica inc. (NASDAQ:LULU) was in 39 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 52. LULU has experienced a decrease in support from the world’s most elite money managers recently. There were 40 hedge funds in our database with LULU holdings at the end of March. Our calculations also showed that LULU 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.

Anna Nikolayevsky of Axel Capital

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. Keeping this in mind we’re going to review the key hedge fund action regarding Lululemon Athletica inc. (NASDAQ:LULU).

What have hedge funds been doing with Lululemon Athletica inc. (NASDAQ:LULU)?

At the end of the second quarter, a total of 39 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the first quarter of 2020. On the other hand, there were a total of 49 hedge funds with a bullish position in LULU a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Lululemon Athletica inc. (NASDAQ:LULU) was held by Citadel Investment Group, which reported holding $292 million worth of stock at the end of June. It was followed by Renaissance Technologies with a $185.9 million position. Other investors bullish on the company included D E Shaw, AQR Capital Management, and PEAK6 Capital Management. In terms of the portfolio weights assigned to each position Axel Capital Management allocated the biggest weight to Lululemon Athletica inc. (NASDAQ:LULU), around 6.11% of its 13F portfolio. Navellier & Associates is also relatively very bullish on the stock, setting aside 2.04 percent of its 13F equity portfolio to LULU.

Judging by the fact that Lululemon Athletica inc. (NASDAQ:LULU) has experienced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there was a specific group of hedgies that elected to cut their full holdings heading into Q3. At the top of the heap, Eashwar Krishnan’s Tybourne Capital Management said goodbye to the biggest position of the 750 funds monitored by Insider Monkey, totaling about $78.7 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund sold off about $30.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 1 funds heading into Q3.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Lululemon Athletica inc. (NASDAQ:LULU) but similarly valued. These stocks are Roper Technologies Inc. (NYSE:ROP), TAL Education Group (NYSE:TAL), TC Energy Corporation (NYSE:TRP), Banco Santander, S.A. (NYSE:SAN), Keurig Dr Pepper Inc. (NASDAQ:KDP), Enterprise Products Partners L.P. (NYSE:EPD), and Prudential Public Limited Company (NYSE:PUK). This group of stocks’ market values match LULU’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.6 hedge funds with bullish positions and the average amount invested in these stocks was $719 million. That figure was $687 million in LULU’s case. Roper Technologies Inc. (NYSE:ROP) is the most popular stock in this table. On the other hand Prudential Public Limited Company (NYSE:PUK) is the least popular one with only 5 bullish hedge fund positions. Lululemon Athletica inc. (NASDAQ:LULU) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LULU is 69. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately LULU wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LULU were disappointed as the stock returned 2.3% since the end of June (through 10/30) 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.