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Hedge Funds Dissect Goldman Sachs’ Best Quality Consumer Discretionary Stocks

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The U.S. Federal Reserve is set to hold a two-day policy meeting this week, which will either intensify the debate on a potential rate hike or will stop it entirely for the time being. However, many believe that a September rate hike is not well-timed considering the struggling emerging markets and the fears of a Chinese economic slowdown. Janet Yellen, the Fed’s chair, has repeatedly suggested that the Federal Reserve is expected to raise rates this year for the first time since 2006. Hence, there are only three meetings left this year during which the rates can be lifted, so a rate hike will almost surely take place sooner than later. The Goldman Sachs Group Inc. (NYSE:GS) sent a note to its clients last week claiming that historically, “quality” stocks have a propensity to outperform during the first three-month period after an initial rate hike. Moving back to what a quality stock represents, Goldman asserts that quality stocks have strong balance sheets, high returns on capital, low volatility, strong margins, high dividend yields, and stable growth in sales and earnings. In the following article, we will take a look at five consumer discretionary stocks that made Goldman’s top ten quality stocks list and will also look at how the hedge funds monitored by our team feel about these stocks.


Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 118% over the last 36 months and outperformed the S&P 500 Index by 60 percentage points (see the details here).

5. O’Reilly Automotive Inc (NASDAQ:ORLY)

Investors with Long Positions (as of June 30): 32

Aggregate Value of Investors’ Holdings (as of June 30): $1.49 Billion

Let’s start by looking at O’Reilly Automotive Inc (NASDAQ:ORLY), which is the second-best quality stock from the aforementioned list. The stock was owned by 28 hedge funds within our database at the end of the first quarter, when the value of their investments in the company stood at $1.56 billion, so there was mixed trading activity on the stock in the second quarter. The stock has been on a steady uptrend since the beginning of the year, gaining over 26% year-to-date. The specialty retailer of automotive aftermarket parts, tools, supplies, equipment and accessories reckons that one of the key drivers of the demand for its products is the shrinking U.S unemployment rate. Considering that and the fact that consumer confidence has been strengthening, O’Reilly Automotive’s products have been in great demand this year. Mario Gabelli’s GAMCO Investors is among the bullish investors of O’Reilly Automotive Inc (NASDAQ:ORLY) within our database, owning 692,048 shares as of June 30.

4. TJX Companies Inc (NYSE:TJX)

Investors with Long Positions (as of June 30): 33

Aggregate Value of Investors’ Holdings (as of June 30): $1.28 Billion

TJX Companies Inc (NYSE:TJX) is the fifth-ranked consumer discretionary stock on Goldman’s top ten quality stocks list. Four more hedge funds observed by the Insider Monkey team added the stock to their portfolios during the latest quarter, while the value of their total stakes increased to $1.28 billion from $1.07 billion. TJX’s stock performance has been more or less stable throughout 2015, delivering a return of almost 4% since the beginning of the year. This off-price retailer of apparel has also been able to grow organically, reporting consolidated comparable store sales growth of 6% year-over-year. Cliff Asness’ AQR Capital Management reported owning 1.96 million shares of TJX Companies Inc (NYSE:TJX) in its latest 13F filing with the SEC.

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