Were Hedge Funds Right About Souring On Lowe’s Companies, Inc. (LOW)?

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 Lowe’s Companies, Inc. (NYSE:LOW) and determine whether the smart money was really smart about this stock.

Lowe’s Companies, Inc. (NYSE:LOW) shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. LOW was in 71 hedge funds’ portfolios at the end of the first quarter of 2020. There were 77 hedge funds in our database with LOW positions at the end of the previous quarter. Our calculations also showed that LOW 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.

Martin Whitman of Third Avenue 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. Keeping this in mind let’s take a look at the fresh hedge fund action encompassing Lowe’s Companies, Inc. (NYSE:LOW).

What does smart money think about Lowe’s Companies, Inc. (NYSE:LOW)?

At Q1’s end, a total of 71 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in LOW over the last 18 quarters. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Pershing Square held the most valuable stake in Lowe’s Companies, Inc. (NYSE:LOW), which was worth $1054.3 million at the end of the third quarter. On the second spot was D E Shaw which amassed $628.3 million worth of shares. Viking Global, OZ Management, and Palestra Capital 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 Pershing Square allocated the biggest weight to Lowe’s Companies, Inc. (NYSE:LOW), around 16.04% of its 13F portfolio. Venator Capital Management is also relatively very bullish on the stock, earmarking 7.12 percent of its 13F equity portfolio to LOW.

Because Lowe’s Companies, Inc. (NYSE:LOW) has faced bearish sentiment from hedge fund managers, it’s easy to see that there was a specific group of hedge funds that slashed their entire stakes heading into Q4. Intriguingly, Aaron Cowen’s Suvretta Capital Management dropped the largest position of all the hedgies tracked by Insider Monkey, worth close to $142.3 million in stock. John Khoury’s fund, Long Pond Capital, also dropped its stock, about $87.4 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 6 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Lowe’s Companies, Inc. (NYSE:LOW) but similarly valued. These stocks are Fiserv, Inc. (NASDAQ:FISV), Caterpillar Inc. (NYSE:CAT), Stryker Corporation (NYSE:SYK), and Becton, Dickinson and Company (NYSE:BDX). This group of stocks’ market valuations are similar to LOW’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 51.25 hedge funds with bullish positions and the average amount invested in these stocks was $1827 million. That figure was $3845 million in LOW’s case. Fiserv, Inc. (NASDAQ:FISV) is the most popular stock in this table. On the other hand Caterpillar Inc. (NYSE:CAT) is the least popular one with only 34 bullish hedge fund positions. Compared to these stocks Lowe’s Companies, Inc. (NYSE:LOW) 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 LOW as the stock returned 54% 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.