At Insider Monkey, we track the equity portfolios of more than 450 hedge funds and other prominent investors. Once a quarter, this data is updated in accordance with SEC 13F filings, allowing us to provide insight into which companies have fallen in and out of the smart money’s favor. Historically, bullish consensus among hedgies has been used to beat the market (here’s how to use this strategy yourself), but it’s important for investors to pay attention to bearish sentiment as well.
The easiest way to measure this phenomenon is by thinking of it as a type of “capital flight,” which is the common Econ 101 term used to describe an outflow of assets from a country or region. In this particular case, we’ve found that at the end of the fourth quarter, a little more than 1,500 stocks saw at least one dollar’s worth of hedge fund-style capital flight in comparison to the previous quarter.
Within this group, which represents about 45% of the smart money’s total equity universe, exists a pretty startling conclusion: nine of the top 20 companies lie within the consumer services sector. The next highest sector is tech with five companies, followed by energy, with four.
Focusing on the nine consumer service stocks that have experienced a decline in aggregate hedge fund capital, major retailers Sears Holdings Corporation (NASDAQ:SHLD), Wal-Mart Stores, Inc. (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST), Target Corporation (NYSE:TGT) and J.C. Penney Company, Inc. (NYSE:JCP) are all present. Listed in order of largest to smallest, this unfortunate quintet saw an average capital flight of $704.1 million among the hedge funds we track, with Sears hitting a high above the $1 billion mark.
In percentage terms, Target was the retailer hit the hardest by this trend, losing nearly 50% of hedgies’ capital in the fourth quarter compared to one quarter earlier. J.C. Penney, Costco and Sears, meanwhile, saw capital flight of about 30%, while Wal-Mart saw 9.8% of hedge funds’ capital diminish.
While this is a lot of data to take in at once, there are a couple key conclusions we can draw.
The first is that Wal-Mart should still be viewed as the smart money’s best bet in this space. In addition to the fact that it has seen less capital flight—in percentage terms—than its aforementioned peers, Wal-Mart is the retail industry’s only stock that had bullish interest from more than 50 of the hedge funds we track last quarter. The next highest is Dollar General Corp. (NYSE:DG) with 44, followed by Dollar Tree, Inc. (NASDAQ:DLTR) and Costco, both in the upper-30s. The remaining members of the “unfortunate quintet” described above all sport an average of just 26 hedge funds invested.
Equally as important, it’s worth mentioning that the quality of hedgies devoted to Wal-Mart is top-notch; mega-managers Warren Buffett (see Buffett’s top picks), Ken Griffin, Jim Simons and Israel Englander, to name a few, all hold long positions. Prem Watsa and Ray Dalio are also bullish.
Despite the fact that on the whole, the retailer experienced hedge fund capital flight in the fourth quarter, there are reasons to be optimistic about Wal-Mart’s future because of how this data favorably stacks up against its key peers.
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