Did Hedge Funds Make The Right Call On Builders FirstSource, Inc. (BLDR) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Builders FirstSource, Inc. (NASDAQ:BLDR) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Builders FirstSource, Inc. (NASDAQ:BLDR) investors should pay attention to a decrease in enthusiasm from smart money recently. Our calculations also showed that BLDR 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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 tiny lithium stock. Now let’s take a glance at the fresh hedge fund action regarding Builders FirstSource, Inc. (NASDAQ:BLDR).

How are hedge funds trading Builders FirstSource, Inc. (NASDAQ:BLDR)?

At the end of the first quarter, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -28% from the fourth quarter of 2019. By comparison, 37 hedge funds held shares or bullish call options in BLDR a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Renaissance Technologies held the most valuable stake in Builders FirstSource, Inc. (NASDAQ:BLDR), which was worth $53.3 million at the end of the third quarter. On the second spot was Stadium Capital Management which amassed $36.5 million worth of shares. Select Equity Group, Arrowstreet Capital, and Soapstone 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 Stadium Capital Management allocated the biggest weight to Builders FirstSource, Inc. (NASDAQ:BLDR), around 20.67% of its 13F portfolio. Soapstone Capital is also relatively very bullish on the stock, setting aside 19.5 percent of its 13F equity portfolio to BLDR.

Seeing as Builders FirstSource, Inc. (NASDAQ:BLDR) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of funds that slashed their full holdings last quarter. It’s worth mentioning that Israel Englander’s Millennium Management said goodbye to the largest stake of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $12.7 million in stock, and Thomas E. Claugus’s GMT Capital was right behind this move, as the fund dumped about $9.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 11 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Builders FirstSource, Inc. (NASDAQ:BLDR). These stocks are Shake Shack Inc (NYSE:SHAK), Adtalem Global Education Inc. (NYSE:ATGE), 8×8, Inc. (NASDAQ:EGHT), and NBT Bancorp Inc. (NASDAQ:NBTB). This group of stocks’ market values resemble BLDR’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $260 million. That figure was $304 million in BLDR’s case. Shake Shack Inc (NYSE:SHAK) is the most popular stock in this table. On the other hand NBT Bancorp Inc. (NASDAQ:NBTB) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Builders FirstSource, Inc. (NASDAQ:BLDR) 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on BLDR as the stock returned 69.3% in Q2 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.

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