Were Hedge Funds Right About Souring On Tapestry, Inc. (TPR)?

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 Tapestry, Inc. (NYSE:TPR) and determine whether hedge funds had an edge regarding this stock.

Tapestry, Inc. (NYSE:TPR) investors should be aware of a decrease in activity from the world’s largest hedge funds of late. TPR was in 37 hedge funds’ portfolios at the end of March. There were 40 hedge funds in our database with TPR holdings at the end of the previous quarter. Our calculations also showed that TPR 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

John Rogers of Ariel Investments

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 we’re going to take a look at the latest hedge fund action surrounding Tapestry, Inc. (NYSE:TPR).

What have hedge funds been doing with Tapestry, Inc. (NYSE:TPR)?

At the end of the first quarter, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the fourth quarter of 2019. By comparison, 29 hedge funds held shares or bullish call options in TPR a year ago. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Among these funds, Samlyn Capital held the most valuable stake in Tapestry, Inc. (NYSE:TPR), which was worth $114 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $51.4 million worth of shares. Two Sigma Advisors, Antipodes Partners, and Ariel Investments 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 Samlyn Capital allocated the biggest weight to Tapestry, Inc. (NYSE:TPR), around 2.88% of its 13F portfolio. Portland Hill Asset Management is also relatively very bullish on the stock, dishing out 2.85 percent of its 13F equity portfolio to TPR.

Since Tapestry, Inc. (NYSE:TPR) has experienced a decline in interest from the smart money, it’s easy to see that there lies a certain “tier” of hedge funds that elected to cut their positions entirely in the first quarter. At the top of the heap, Steven Boyd’s Armistice Capital dropped the biggest stake of the 750 funds watched by Insider Monkey, worth about $7.9 million in stock, and Kamyar Khajavi’s MIK Capital was right behind this move, as the fund dropped about $5.4 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 3 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Tapestry, Inc. (NYSE:TPR) but similarly valued. We will take a look at AGCO Corporation (NYSE:AGCO), TerraForm Power Inc (NASDAQ:TERP), Graphic Packaging Holding Company (NYSE:GPK), and Neogen Corporation (NASDAQ:NEOG). All of these stocks’ market caps resemble TPR’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $179 million. That figure was $351 million in TPR’s case. Graphic Packaging Holding Company (NYSE:GPK) is the most popular stock in this table. On the other hand Neogen Corporation (NASDAQ:NEOG) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Tapestry, Inc. (NYSE:TPR) 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. Unfortunately TPR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TPR were disappointed as the stock returned 2.5% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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