Were Hedge Funds Right About Crowding The Home Depot, Inc. (HD)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards The Home Depot, Inc. (NYSE:HD).

Is The Home Depot, Inc. (NYSE:HD) going to take off soon? The best stock pickers were in a pessimistic mood. The number of bullish hedge fund bets fell by 2 recently. The Home Depot, Inc. (NYSE:HD) was in 85 hedge funds’ portfolios at the end of June. The all time high for this statistics is 91. Our calculations also showed that HD 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 87 hedge funds in our database with HD 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.

David Siegel of Two Sigma Advisors

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. Now let’s take a look at the new hedge fund action encompassing The Home Depot, Inc. (NYSE:HD).

Hedge fund activity in The Home Depot, Inc. (NYSE:HD)

At the end of the second quarter, a total of 85 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HD over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Fisher Asset Management, managed by Ken Fisher, holds the largest position in The Home Depot, Inc. (NYSE:HD). Fisher Asset Management has a $1.6011 billion position in the stock, comprising 1.6% of its 13F portfolio. Coming in second is AQR Capital Management, led by Cliff Asness, holding a $513.8 million position; 0.8% of its 13F portfolio is allocated to the stock. Remaining peers that are bullish encompass John Overdeck and David Siegel’s Two Sigma Advisors, and Phill Gross and Robert Atchinson’s Adage Capital Management. In terms of the portfolio weights assigned to each position Pittencrieff Partners – Gabalex Capital allocated the biggest weight to The Home Depot, Inc. (NYSE:HD), around 7.89% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, designating 6.3 percent of its 13F equity portfolio to HD.

Seeing as The Home Depot, Inc. (NYSE:HD) has witnessed falling interest from the smart money, we can see that there lies a certain “tier” of hedge funds who sold off their entire stakes by the end of the second quarter. It’s worth mentioning that Alexander Mitchell’s Scopus Asset Management said goodbye to the biggest investment of all the hedgies tracked by Insider Monkey, comprising close to $24.3 million in stock. Mark Kingdon’s fund, Kingdon Capital, also said goodbye to its stock, about $15.5 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 2 funds by the end of the second quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Home Depot, Inc. (NYSE:HD) but similarly valued. We will take a look at Intel Corporation (NASDAQ:INTC), NVIDIA Corporation (NASDAQ:NVDA), Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), Adobe Inc. (NASDAQ:ADBE), Bank of America Corporation (NYSE:BAC), and Paypal Holdings Inc (NASDAQ:PYPL). This group of stocks’ market caps resemble HD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 90.6 hedge funds with bullish positions and the average amount invested in these stocks was $8868 million. That figure was $4643 million in HD’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand AT&T Inc. (NYSE:T) is the least popular one with only 57 bullish hedge fund positions. The Home Depot, Inc. (NYSE:HD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HD is 47.1. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. A small number of hedge funds were also right about betting on HD as the stock returned 15.4% since the end of the second quarter (through 10/16) and outperformed the market by an even larger margin.

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