Did Hedge Funds Make The Right Call On Lennox International Inc. (LII) ?

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 Lennox International Inc. (NYSE:LII) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Lennox International Inc. (NYSE:LII) has experienced a decrease in enthusiasm from smart money of late. Our calculations also showed that LII 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 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.

Steven Cohen

Steven Cohen of Point72 Asset Management

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. With all of this in mind let’s analyze the fresh hedge fund action surrounding Lennox International Inc. (NYSE:LII).

What does smart money think about Lennox International Inc. (NYSE:LII)?

At Q1’s end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -34% from the previous quarter. On the other hand, there were a total of 19 hedge funds with a bullish position in LII a year ago. 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, Impax Asset Management held the most valuable stake in Lennox International Inc. (NYSE:LII), which was worth $55.2 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $48.5 million worth of shares. Two Sigma Advisors, Citadel Investment Group, and Bishop Rock 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 Bishop Rock Capital allocated the biggest weight to Lennox International Inc. (NYSE:LII), around 2.91% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, earmarking 0.73 percent of its 13F equity portfolio to LII.

Seeing as Lennox International Inc. (NYSE:LII) has experienced falling interest from hedge fund managers, it’s easy to see that there were a few hedgies who were dropping their full holdings heading into Q4. At the top of the heap, Alexander Mitchell’s Scopus Asset Management cut the biggest position of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $17.1 million in stock, and Bernard Selz’s Selz Capital was right behind this move, as the fund dropped about $13.2 million worth. These moves are important to note, as total hedge fund interest was cut by 11 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Lennox International Inc. (NYSE:LII) but similarly valued. We will take a look at Arconic Corporation (NYSE:ARNC), Carlisle Companies, Inc. (NYSE:CSL), American Homes 4 Rent (NYSE:AMH), and SEI Investments Company (NASDAQ:SEIC). This group of stocks’ market caps are closest to LII’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ARNC 25 1740220 -18
CSL 23 262658 -3
AMH 21 177852 -2
SEIC 33 254738 4
Average 25.5 608867 -4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $609 million. That figure was $169 million in LII’s case. SEI Investments Company (NASDAQ:SEIC) is the most popular stock in this table. On the other hand American Homes 4 Rent (NYSE:AMH) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Lennox International Inc. (NYSE:LII) is even less popular than AMH. Hedge funds clearly dropped the ball on LII as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 and still beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on LII as the stock returned 50.1% since the end of March and outperformed the market by an even larger margin.

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