Were Hedge Funds Right About Crowding Into HD Supply Holdings Inc (HDS)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards HD Supply Holdings Inc (NASDAQ:HDS).

HD Supply Holdings Inc (NASDAQ:HDS) has seen an increase in hedge fund interest in recent months. HD Supply Holdings Inc (NASDAQ:HDS) was in 44 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 55. Our calculations also showed that HDS 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.

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 was 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’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.

Seth Klarman of Baupost Group

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. With all of this in mind let’s take a glance at the new hedge fund action surrounding HD Supply Holdings Inc (NASDAQ:HDS).

How have hedgies been trading HD Supply Holdings Inc (NASDAQ:HDS)?

At second quarter’s end, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from one quarter earlier. By comparison, 30 hedge funds held shares or bullish call options in HDS a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Seth Klarman’s Baupost Group has the number one position in HD Supply Holdings Inc (NASDAQ:HDS), worth close to $229.4 million, accounting for 2.9% of its total 13F portfolio. On Baupost Group’s heels is Iridian Asset Management, managed by David Cohen and Harold Levy, which holds a $145.4 million position; the fund has 3.2% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions contain Ricky Sandler’s Eminence Capital, D. E. Shaw’s D E Shaw and Anthony Bozza’s Lakewood Capital Management. In terms of the portfolio weights assigned to each position Impactive Capital allocated the biggest weight to HD Supply Holdings Inc (NASDAQ:HDS), around 13.06% of its 13F portfolio. Marathon Partners is also relatively very bullish on the stock, earmarking 8.93 percent of its 13F equity portfolio to HDS.

As one would reasonably expect, key hedge funds were breaking ground themselves. Lakewood Capital Management, managed by Anthony Bozza, initiated the most outsized position in HD Supply Holdings Inc (NASDAQ:HDS). Lakewood Capital Management had $52.9 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also made a $4.3 million investment in the stock during the quarter. The other funds with new positions in the stock are George McCabe’s Portolan Capital Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Ray Dalio’s Bridgewater Associates.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as HD Supply Holdings Inc (NASDAQ:HDS) but similarly valued. We will take a look at Apartment Investment and Management Co. (NYSE:AIV), AppFolio Inc (NASDAQ:APPF), Zions Bancorporation, National Association (NASDAQ:ZION), Ingredion Incorporated (NYSE:INGR), Kimco Realty Corp (NYSE:KIM), Teck Resources Ltd (NYSE:TECK), and SolarWinds Corporation (NYSE:SWI). This group of stocks’ market valuations are similar to HDS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.3 hedge funds with bullish positions and the average amount invested in these stocks was $578 million. That figure was $993 million in HDS’s case. Kimco Realty Corp (NYSE:KIM) is the most popular stock in this table. On the other hand SolarWinds Corporation (NYSE:SWI) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks HD Supply Holdings Inc (NASDAQ:HDS) is more popular among hedge funds. Our overall hedge fund sentiment score for HDS is 83. 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 HDS as the stock returned 22.9% 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.