How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Hanesbrands Inc. (NYSE:HBI) and determine whether hedge funds had an edge regarding this stock.
Hanesbrands Inc. (NYSE:HBI) shareholders have witnessed a decrease in enthusiasm from smart money lately. HBI was in 36 hedge funds’ portfolios at the end of the first quarter of 2020. There were 40 hedge funds in our database with HBI holdings at the end of the previous quarter. Our calculations also showed that HBI 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.
Philippe Laffont of Coatue 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. Now let’s take a peek at the key hedge fund action regarding Hanesbrands Inc. (NYSE:HBI).
What does smart money think about Hanesbrands Inc. (NYSE:HBI)?
Heading into the second quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HBI over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Diamond Hill Capital, managed by Ric Dillon, holds the most valuable position in Hanesbrands Inc. (NYSE:HBI). Diamond Hill Capital has a $163.9 million position in the stock, comprising 1.1% of its 13F portfolio. Coming in second is Lyrical Asset Management, managed by Andrew Wellington and Jeff Keswin, which holds a $106.9 million position; the fund has 2.6% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions encompass Cliff Asness’s AQR Capital Management, Paul Marshall and Ian Wace’s Marshall Wace LLP and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Barington Capital Group allocated the biggest weight to Hanesbrands Inc. (NYSE:HBI), around 7.07% of its 13F portfolio. Lyrical Asset Management is also relatively very bullish on the stock, earmarking 2.63 percent of its 13F equity portfolio to HBI.
Because Hanesbrands Inc. (NYSE:HBI) has witnessed declining sentiment from the smart money, we can see that there exists a select few hedgies who sold off their positions entirely by the end of the first quarter. At the top of the heap, Kerr Neilson’s Platinum Asset Management sold off the biggest stake of the 750 funds followed by Insider Monkey, comprising close to $11.8 million in stock, and Brandon Haley’s Holocene Advisors was right behind this move, as the fund cut about $5.7 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 4 funds by the end of the first quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Hanesbrands Inc. (NYSE:HBI) but similarly valued. We will take a look at RBC Bearings Incorporated (NASDAQ:ROLL), Physicians Realty Trust (NYSE:DOC), Nextera Energy Partners LP (NYSE:NEP), and Agree Realty Corporation (NYSE:ADC). This group of stocks’ market values are similar to HBI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ROLL | 9 | 39699 | -1 |
| DOC | 16 | 133862 | 5 |
| NEP | 21 | 96521 | 4 |
| ADC | 21 | 310469 | 3 |
| Average | 16.75 | 145138 | 2.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $145 million. That figure was $365 million in HBI’s case. Nextera Energy Partners LP (NYSE:NEP) is the most popular stock in this table. On the other hand RBC Bearings Incorporated (NASDAQ:ROLL) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Hanesbrands Inc. (NYSE:HBI) 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on HBI as the stock returned 46% in Q2 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.
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Disclosure: None. This article was originally published at Insider Monkey.
