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Did Hedge Funds Make The Right Call On Beacon Roofing Supply, Inc. (BECN)?

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 Beacon Roofing Supply, Inc. (NASDAQ:BECN) and determine whether hedge funds had an edge regarding this stock.

Beacon Roofing Supply, Inc. (NASDAQ:BECN) has experienced a decrease in support from the world’s most elite money managers in recent months. Our calculations also showed that BECN 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Clint Carlson of Carlson Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium 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. Keeping this in mind we’re going to take a gander at the latest hedge fund action regarding Beacon Roofing Supply, Inc. (NASDAQ:BECN).

How have hedgies been trading Beacon Roofing Supply, Inc. (NASDAQ:BECN)?

At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the previous quarter. The graph below displays the number of hedge funds with bullish position in BECN over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is BECN A Good Stock To Buy?

The largest stake in Beacon Roofing Supply, Inc. (NASDAQ:BECN) was held by Adage Capital Management, which reported holding $53.7 million worth of stock at the end of September. It was followed by Iridian Asset Management with a $53.4 million position. Other investors bullish on the company included Fisher Asset Management, Soapstone Capital, and D E Shaw. In terms of the portfolio weights assigned to each position Soapstone Capital allocated the biggest weight to Beacon Roofing Supply, Inc. (NASDAQ:BECN), around 9.62% of its 13F portfolio. Iridian Asset Management is also relatively very bullish on the stock, earmarking 1.29 percent of its 13F equity portfolio to BECN.

Seeing as Beacon Roofing Supply, Inc. (NASDAQ:BECN) has experienced bearish sentiment from the smart money, we can see that there is a sect of hedge funds that elected to cut their full holdings by the end of the first quarter. It’s worth mentioning that Clint Carlson’s Carlson Capital said goodbye to the biggest position of the “upper crust” of funds followed by Insider Monkey, worth close to $7 million in stock. Ian Simm’s fund, Impax Asset Management, also sold off its stock, about $3.8 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 2 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks similar to Beacon Roofing Supply, Inc. (NASDAQ:BECN). These stocks are LGI Homes Inc (NASDAQ:LGIH), Allscripts Healthcare Solutions Inc (NASDAQ:MDRX), Shutterstock Inc (NYSE:SSTK), and Industrial Logistics Properties Trust (NASDAQ:ILPT). All of these stocks’ market caps match BECN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LGIH 14 53155 1
MDRX 17 126905 -14
SSTK 13 77238 -2
ILPT 9 60718 -4
Average 13.25 79504 -4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. That figure was $164 million in BECN’s case. Allscripts Healthcare Solutions Inc (NASDAQ:MDRX) is the most popular stock in this table. On the other hand Industrial Logistics Properties Trust (NASDAQ:ILPT) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Beacon Roofing Supply, Inc. (NASDAQ:BECN) is more popular among hedge funds. 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 returned 18.6% in 2020 through July 27th but still managed to beat the market by 17.1 percentage points. Hedge funds were also right about betting on BECN as the stock returned 81.7% since Q1 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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