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 La-Z-Boy Incorporated (NYSE:LZB) and determine whether hedge funds had an edge regarding this stock.
Hedge fund interest in La-Z-Boy Incorporated (NYSE:LZB) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Lakeland Financial Corporation (NASDAQ:LKFN), Sally Beauty Holdings, Inc. (NYSE:SBH), and The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) to gather more data points. Our calculations also showed that LZB 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to review the new hedge fund action encompassing La-Z-Boy Incorporated (NYSE:LZB).
Hedge fund activity in La-Z-Boy Incorporated (NYSE:LZB)
At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards LZB over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, GAMCO Investors held the most valuable stake in La-Z-Boy Incorporated (NYSE:LZB), which was worth $7.3 million at the end of the third quarter. On the second spot was Royce & Associates which amassed $7.2 million worth of shares. D E Shaw, Maverick Capital, and Citadel Investment Group 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 Quantinno Capital allocated the biggest weight to La-Z-Boy Incorporated (NYSE:LZB), around 0.13% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.1 percent of its 13F equity portfolio to LZB.
Because La-Z-Boy Incorporated (NYSE:LZB) has witnessed a decline in interest from hedge fund managers, logic holds that there exists a select few hedgies who sold off their full holdings in the first quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital cut the largest stake of the 750 funds monitored by Insider Monkey, comprising an estimated $8 million in stock. Philippe Laffont’s fund, Coatue Management, also said goodbye to its stock, about $1.2 million worth. These moves are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s go over hedge fund activity in other stocks similar to La-Z-Boy Incorporated (NYSE:LZB). We will take a look at Lakeland Financial Corporation (NASDAQ:LKFN), Sally Beauty Holdings, Inc. (NYSE:SBH), The Bank of N.T. Butterfield & Son Limited (NYSE:NTB), and Supernus Pharmaceuticals Inc (NASDAQ:SUPN). This group of stocks’ market valuations match LZB’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $72 million. That figure was $40 million in LZB’s case. Supernus Pharmaceuticals Inc (NASDAQ:SUPN) is the most popular stock in this table. On the other hand Lakeland Financial Corporation (NASDAQ:LKFN) is the least popular one with only 9 bullish hedge fund positions. La-Z-Boy Incorporated (NYSE:LZB) is not the most popular stock in this group but hedge fund interest is still above average. 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 18.6% in 2020 through July 27th but still beat the market by 17.1 percentage points. Hedge funds were also right about betting on LZB as the stock returned 35.9% since Q1 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.