Were Hedge Funds Right About Piling Into D.R. Horton, Inc. (DHI)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. 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 we look at how hedge funds traded D.R. Horton, Inc. (NYSE:DHI) and determine whether the smart money was really smart about this stock.

D.R. Horton, Inc. (NYSE:DHI) investors should be aware of an increase in hedge fund interest of late. DHI was in 65 hedge funds’ portfolios at the end of March. There were 51 hedge funds in our database with DHI holdings at the end of the previous quarter. Our calculations also showed that DHI 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.

Israel Englander of Millennium Management

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 check out the new hedge fund action regarding D.R. Horton, Inc. (NYSE:DHI).

What does smart money think about D.R. Horton, Inc. (NYSE:DHI)?

At Q1’s end, a total of 65 of the hedge funds tracked by Insider Monkey were long this stock, a change of 27% from the previous quarter. By comparison, 46 hedge funds held shares or bullish call options in DHI a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Greenhaven Associates was the largest shareholder of D.R. Horton, Inc. (NYSE:DHI), with a stake worth $278.5 million reported as of the end of September. Trailing Greenhaven Associates was Egerton Capital Limited, which amassed a stake valued at $203.1 million. Long Pond Capital, Eminence Capital, and Soros Fund Management 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 Greenhaven Associates allocated the biggest weight to D.R. Horton, Inc. (NYSE:DHI), around 10.36% of its 13F portfolio. Long Pond Capital is also relatively very bullish on the stock, earmarking 5.88 percent of its 13F equity portfolio to DHI.

With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Capital Growth Management, managed by Ken Heebner, initiated the largest position in D.R. Horton, Inc. (NYSE:DHI). Capital Growth Management had $38.6 million invested in the company at the end of the quarter. Daniel Sundheim’s D1 Capital Partners also initiated a $34.5 million position during the quarter. The other funds with new positions in the stock are Patrick Degorce’s Theleme Partners, John Brennan’s Sirios Capital Management, and Alexander Mitchell’s Scopus Asset Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as D.R. Horton, Inc. (NYSE:DHI) but similarly valued. These stocks are Western Digital Corporation (NASDAQ:WDC), Extra Space Storage, Inc. (NYSE:EXR), Energy Transfer L.P. (NYSE:ET), and Wheaton Precious Metals Corp. (NYSE:WPM). This group of stocks’ market values match DHI’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $428 million. That figure was $1266 million in DHI’s case. Western Digital Corporation (NASDAQ:WDC) is the most popular stock in this table. On the other hand Extra Space Storage, Inc. (NYSE:EXR) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks D.R. Horton, Inc. (NYSE:DHI) is more popular among hedge funds. 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 13.3% in 2020 through June 25th but still managed to beat the market by 16.8 percentage points. Hedge funds were also right about betting on DHI as the stock returned 59.7% so far in Q2 (through June 25th) 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.