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Coty Inc (COTY): Are Hedge Funds Right About This Stock?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Coty Inc (NYSE:COTY).

Coty Inc (NYSE:COTY) was in 33 hedge funds’ portfolios at the end of March. COTY investors should be aware of an increase in hedge fund sentiment lately. There were 29 hedge funds in our database with COTY holdings at the end of the previous quarter. Our calculations also showed that COTY 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 51 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.

Ricky Sandler of Eminence Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a peek at the latest hedge fund action encompassing Coty Inc (NYSE:COTY).

What have hedge funds been doing with Coty Inc (NYSE:COTY)?

At Q1’s end, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the previous quarter. The graph below displays the number of hedge funds with bullish position in COTY over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Eminence Capital was the largest shareholder of Coty Inc (NYSE:COTY), with a stake worth $67.1 million reported as of the end of September. Trailing Eminence Capital was JNE Partners, which amassed a stake valued at $27.5 million. Contrarius Investment Management, Woodson Capital Management, and Arrowstreet Capital 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 JNE Partners allocated the biggest weight to Coty Inc (NYSE:COTY), around 28.56% of its 13F portfolio. Rip Road Capital is also relatively very bullish on the stock, designating 2.05 percent of its 13F equity portfolio to COTY.

As aggregate interest increased, specific money managers have been driving this bullishness. Woodson Capital Management, managed by James Woodson Davis, initiated the largest position in Coty Inc (NYSE:COTY). Woodson Capital Management had $12.4 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also initiated a $3.5 million position during the quarter. The following funds were also among the new COTY investors: Mike Vranos’s Ellington, Yi Xin’s Ariose Capital, and Cliff Asness’s AQR Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Coty Inc (NYSE:COTY) but similarly valued. We will take a look at Hudson Pacific Properties Inc (NYSE:HPP), US Foods Holding Corp. (NYSE:USFD), Equity Commonwealth (NYSE:EQC), and Cogent Communications Holdings Inc. (NASDAQ:CCOI). This group of stocks’ market valuations match COTY’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HPP 19 231967 0
USFD 33 507135 -4
EQC 20 176264 -2
CCOI 27 454195 3
Average 24.75 342390 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $342 million. That figure was $183 million in COTY’s case. US Foods Holding Corp. (NYSE:USFD) is the most popular stock in this table. On the other hand Hudson Pacific Properties Inc (NYSE:HPP) is the least popular one with only 19 bullish hedge fund positions. Coty Inc (NYSE:COTY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 8.3% in 2020 through the end of May but beat the market by 13.2 percentage points. Unfortunately COTY wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on COTY were disappointed as the stock returned -29.7% during the same time period 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 many of these stocks already outperformed the market so far this year.

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