Were Hedge Funds Right About Chewy, Inc. (CHWY)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtChewy, Inc. (NYSE:CHWY) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Chewy, Inc. (NYSE:CHWY) has seen an increase in hedge fund sentiment in recent months. CHWY was in 36 hedge funds’ portfolios at the end of the first quarter of 2020. There were 35 hedge funds in our database with CHWY holdings at the end of the previous quarter. Our calculations also showed that CHWY isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.

Louis Bacon Moore of Moore Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s view the fresh hedge fund action surrounding Chewy, Inc. (NYSE:CHWY).

What have hedge funds been doing with Chewy, Inc. (NYSE:CHWY)?

At the end of the first quarter, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CHWY over the last 18 quarters. 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 Chewy, Inc. (NYSE:CHWY) was held by Tybourne Capital Management, which reported holding $131.8 million worth of stock at the end of September. It was followed by Zevenbergen Capital Investments with a $55.2 million position. Other investors bullish on the company included Marshall Wace LLP, Lone Pine Capital, and Tiger Global Management LLC. In terms of the portfolio weights assigned to each position Portsea Asset Management allocated the biggest weight to Chewy, Inc. (NYSE:CHWY), around 13.95% of its 13F portfolio. Rip Road Capital is also relatively very bullish on the stock, setting aside 10.03 percent of its 13F equity portfolio to CHWY.

As industrywide interest jumped, some big names have jumped into Chewy, Inc. (NYSE:CHWY) headfirst. Tybourne Capital Management, managed by Eashwar Krishnan, initiated the most outsized position in Chewy, Inc. (NYSE:CHWY). Tybourne Capital Management had $131.8 million invested in the company at the end of the quarter. Renaissance Technologies also made a $18.4 million investment in the stock during the quarter. The following funds were also among the new CHWY investors: Cyrus de Weck’s Portsea Asset Management, Brett Barakett’s Tremblant Capital, and Sander Gerber’s Hudson Bay Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Chewy, Inc. (NYSE:CHWY) but similarly valued. These stocks are ORIX Corporation (NYSE:IX), Akamai Technologies, Inc. (NASDAQ:AKAM), The Cooper Companies, Inc. (NYSE:COO), and Best Buy Co., Inc. (NYSE:BBY). This group of stocks’ market caps match CHWY’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $582 million. That figure was $493 million in CHWY’s case. Akamai Technologies, Inc. (NASDAQ:AKAM) is the most popular stock in this table. On the other hand ORIX Corporation (NYSE:IX) is the least popular one with only 4 bullish hedge fund positions. Chewy, Inc. (NYSE:CHWY) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately CHWY wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CHWY were disappointed as the stock returned 19.2% during the same time period 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.