Did Hedge Funds Make The Right Call On RH (RH) ?

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

RH (NYSE:RH) was in 30 hedge funds’ portfolios at the end of March. RH shareholders have witnessed a decrease in support from the world’s most elite money managers in recent months. There were 38 hedge funds in our database with RH positions at the end of the previous quarter. Our calculations also showed that RH 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

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. With all of this in mind we’re going to take a peek at the new hedge fund action surrounding RH (NYSE:RH).

Hedge fund activity in RH (NYSE:RH)

At Q1’s end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards RH over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Berkshire Hathaway, managed by Warren Buffett, holds the number one position in RH (NYSE:RH). Berkshire Hathaway has a $171.6 million position in the stock, comprising 0.1% of its 13F portfolio. Coming in second is Renaissance Technologies,  which holds a $128.1 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions include Wilmot B. Harkey and Daniel Mack’s Nantahala Capital Management, and Richard Merage’s MIG Capital. In terms of the portfolio weights assigned to each position Berylson Capital Partners allocated the biggest weight to RH (NYSE:RH), around 8.8% of its 13F portfolio. MIK Capital is also relatively very bullish on the stock, earmarking 3.85 percent of its 13F equity portfolio to RH.

Since RH (NYSE:RH) has experienced falling interest from the smart money, logic holds that there were a few fund managers who sold off their positions entirely in the first quarter. Intriguingly, Ken Heebner’s Capital Growth Management cut the largest position of the “upper crust” of funds followed by Insider Monkey, valued at about $30.3 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund cut about $27.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 8 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as RH (NYSE:RH) but similarly valued. These stocks are Liberty Latin America Ltd. (NASDAQ:LILA), Lithia Motors Inc (NYSE:LAD), Kennedy-Wilson Holdings Inc (NYSE:KW), and Acushnet Holdings Corp. (NYSE:GOLF). This group of stocks’ market caps resemble RH’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $202 million. That figure was $549 million in RH’s case. Lithia Motors Inc (NYSE:LAD) is the most popular stock in this table. On the other hand Liberty Latin America Ltd. (NASDAQ:LILA) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks RH (NYSE:RH) 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 RH as the stock returned 147.7% 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.