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Did Hedge Funds Drop The Ball On Stitch Fix, Inc. (SFIX) ?

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 13.1% in the 2.5 months of 2019 (including dividend payments). Conversely, hedge funds’ 15 preferred S&P 500 stocks generated a return of 19.7% during the same period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Stitch Fix, Inc. (NASDAQ:SFIX).

Is Stitch Fix, Inc. (NASDAQ:SFIX) a buy, sell, or hold? The best stock pickers are getting less optimistic. The number of bullish hedge fund positions went down by 1 lately. Our calculations also showed that SFIX isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

Och-Ziff Capital Management

We’re going to check out the recent hedge fund action regarding Stitch Fix, Inc. (NASDAQ:SFIX).

How have hedgies been trading Stitch Fix, Inc. (NASDAQ:SFIX)?

At the end of the fourth quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in SFIX over the last 14 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

SFIX_apr2019

More specifically, Light Street Capital was the largest shareholder of Stitch Fix, Inc. (NASDAQ:SFIX), with a stake worth $38.8 million reported as of the end of December. Trailing Light Street Capital was Park West Asset Management, which amassed a stake valued at $30 million. Steadfast Capital Management, Renaissance Technologies, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

Seeing as Stitch Fix, Inc. (NASDAQ:SFIX) has experienced a decline in interest from the aggregate hedge fund industry, it’s safe to say that there were a few money managers that slashed their full holdings in the third quarter. It’s worth mentioning that James Crichton’s Hitchwood Capital Management sold off the biggest stake of the “upper crust” of funds watched by Insider Monkey, totaling about $61.3 million in stock. Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s fund, Alta Park Capital, also dumped its stock, about $8.1 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 1 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Stitch Fix, Inc. (NASDAQ:SFIX) but similarly valued. We will take a look at Artisan Partners Asset Management Inc (NYSE:APAM), Appian Corporation (NASDAQ:APPN), United Community Banks Inc (NASDAQ:UCBI), and Brinker International, Inc. (NYSE:EAT). This group of stocks’ market valuations are closest to SFIX’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
APAM 16 118757 3
APPN 9 246766 1
UCBI 14 70664 0
EAT 26 166479 0
Average 16.25 150667 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $151 million. That figure was $132 million in SFIX’s case. Brinker International, Inc. (NYSE:EAT) is the most popular stock in this table. On the other hand Appian Corporation (NASDAQ:APPN) is the least popular one with only 9 bullish hedge fund positions. Stitch Fix, Inc. (NASDAQ:SFIX) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on SFIX as the stock returned 45.5% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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