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Did Hedge Funds Make The Right Call On Ralph Lauren Corporation (RL) ?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Ralph Lauren Corporation (NYSE:RL) based on that data and determine whether they were really smart about the stock.

Is Ralph Lauren Corporation (NYSE:RL) the right investment to pursue these days? The smart money was getting less optimistic. The number of long hedge fund positions fell by 11 lately. Our calculations also showed that RL 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.

If you’d ask most investors, hedge funds are viewed as unimportant, outdated financial tools of years past. While there are more than 8000 funds with their doors open at the moment, We choose to focus on the elite of this group, approximately 850 funds. These money managers preside over bulk of the smart money’s total capital, and by keeping track of their best picks, Insider Monkey has discovered many investment strategies that have historically defeated the market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Donald Yacktman of Yacktman Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to analyze the fresh hedge fund action encompassing Ralph Lauren Corporation (NYSE:RL).

What does smart money think about Ralph Lauren Corporation (NYSE:RL)?

At the end of the first quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -30% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in RL over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Ralph Lauren Corporation (NYSE:RL), which was worth $249.2 million at the end of the third quarter. On the second spot was Yacktman Asset Management which amassed $50 million worth of shares. AQR Capital Management, Gotham Asset Management, and Arrowstreet 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 Yacktman Asset Management allocated the biggest weight to Ralph Lauren Corporation (NYSE:RL), around 0.83% of its 13F portfolio. Cinctive Capital Management is also relatively very bullish on the stock, dishing out 0.34 percent of its 13F equity portfolio to RL.

Since Ralph Lauren Corporation (NYSE:RL) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of hedge funds who were dropping their entire stakes in the first quarter. At the top of the heap, Paul Marshall and Ian Wace’s Marshall Wace LLP dumped the largest investment of all the hedgies watched by Insider Monkey, valued at close to $39.7 million in stock, and Kamyar Khajavi’s MIK Capital was right behind this move, as the fund dropped about $19.4 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 11 funds in the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ralph Lauren Corporation (NYSE:RL) but similarly valued. We will take a look at Lear Corporation (NYSE:LEA), Smartsheet Inc. (NYSE:SMAR), Westlake Chemical Corporation (NYSE:WLK), and Donaldson Company, Inc. (NYSE:DCI). This group of stocks’ market valuations match RL’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LEA 28 581083 -1
SMAR 41 1678822 -3
WLK 20 111151 -2
DCI 20 125557 -1
Average 27.25 624153 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.25 hedge funds with bullish positions and the average amount invested in these stocks was $624 million. That figure was $403 million in RL’s case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand Westlake Chemical Corporation (NYSE:WLK) is the least popular one with only 20 bullish hedge fund positions. Ralph Lauren Corporation (NYSE:RL) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately RL wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RL investors were disappointed as the stock returned 8.5% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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