Was The Smart Money Right About Tractor Supply Company (TSCO)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Tractor Supply Company (NASDAQ:TSCO)? The smart money sentiment can provide an answer to this question.

Tractor Supply Company (NASDAQ:TSCO) was in 38 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. TSCO shareholders have witnessed an increase in hedge fund interest lately. There were 37 hedge funds in our database with TSCO positions at the end of the first quarter. Our calculations also showed that TSCO 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.

John Armitage of Egerton 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. With all of this in mind let’s take a gander at the fresh hedge fund action encompassing Tractor Supply Company (NASDAQ:TSCO).

Hedge fund activity in Tractor Supply Company (NASDAQ:TSCO)

At second quarter’s end, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the first quarter of 2020. On the other hand, there were a total of 35 hedge funds with a bullish position in TSCO a year ago. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Among these funds, Select Equity Group held the most valuable stake in Tractor Supply Company (NASDAQ:TSCO), which was worth $321.1 million at the end of the third quarter. On the second spot was Egerton Capital Limited which amassed $95.4 million worth of shares. AQR Capital Management, Park Presidio Capital, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Park Presidio Capital allocated the biggest weight to Tractor Supply Company (NASDAQ:TSCO), around 7.73% of its 13F portfolio. Parsifal Capital Management is also relatively very bullish on the stock, earmarking 6.83 percent of its 13F equity portfolio to TSCO.

Now, specific money managers were leading the bulls’ herd. Egerton Capital Limited, managed by John Armitage, established the biggest position in Tractor Supply Company (NASDAQ:TSCO). Egerton Capital Limited had $95.4 million invested in the company at the end of the quarter. David Zorub’s Parsifal Capital Management also made a $23.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, Seth Cogswell’s Running Oak Capital, and David Costen Haley’s HBK Investments.

Let’s check out hedge fund activity in other stocks similar to Tractor Supply Company (NASDAQ:TSCO). These stocks are CBRE Group, Inc. (NYSE:CBRE), BioNTech SE (NASDAQ:BNTX), The Cooper Companies, Inc. (NYSE:COO), Warner Music Group Corp. (NASDAQ:WMG), Campbell Soup Company (NYSE:CPB), Essex Property Trust Inc (NYSE:ESS), and Teladoc Health, Inc (NYSE:TDOC). All of these stocks’ market caps resemble TSCO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.4 hedge funds with bullish positions and the average amount invested in these stocks was $727 million. That figure was $828 million in TSCO’s case. Teladoc Health, Inc (NYSE:TDOC) is the most popular stock in this table. On the other hand BioNTech SE (NASDAQ:BNTX) is the least popular one with only 15 bullish hedge fund positions. Tractor Supply Company (NASDAQ:TSCO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TSCO is 71.6. 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 TSCO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TSCO were disappointed as the stock returned 1.3% 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.