Did Hedge Funds Make The Right Call On Toll Brothers Inc (TOL)?

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

Toll Brothers Inc (NYSE:TOL) investors should pay attention to a decrease in hedge fund interest in recent months. TOL was in 20 hedge funds’ portfolios at the end of the first quarter of 2020. There were 31 hedge funds in our database with TOL holdings at the end of the previous quarter. Our calculations also showed that TOL 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. 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. Keeping this in mind we’re going to take a look at the key hedge fund action surrounding Toll Brothers Inc (NYSE:TOL).

How are hedge funds trading Toll Brothers Inc (NYSE:TOL)?

At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -35% from one quarter earlier. By comparison, 28 hedge funds held shares or bullish call options in TOL 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.

When looking at the institutional investors followed by Insider Monkey, Edgar Wachenheim’s Greenhaven Associates has the biggest position in Toll Brothers Inc (NYSE:TOL), worth close to $95.7 million, comprising 3.6% of its total 13F portfolio. On Greenhaven Associates’s heels is Citadel Investment Group, led by Ken Griffin, holding a $36.4 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism encompass Greg Poole’s Echo Street Capital Management, Cliff Asness’s AQR Capital Management and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Greenhaven Associates allocated the biggest weight to Toll Brothers Inc (NYSE:TOL), around 3.56% of its 13F portfolio. Echo Street Capital Management is also relatively very bullish on the stock, designating 0.78 percent of its 13F equity portfolio to TOL.

Judging by the fact that Toll Brothers Inc (NYSE:TOL) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there exists a select few hedgies that decided to sell off their full holdings in the first quarter. Intriguingly, Brandon Haley’s Holocene Advisors dumped the largest stake of all the hedgies followed by Insider Monkey, totaling an estimated $21.1 million in stock, and Noam Gottesman’s GLG Partners was right behind this move, as the fund cut about $18.9 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 11 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Toll Brothers Inc (NYSE:TOL). These stocks are California Water Service Group (NYSE:CWT), Eagle Materials, Inc. (NYSE:EXP), Agios Pharmaceuticals Inc (NASDAQ:AGIO), and Euronav NV (NYSE:EURN). This group of stocks’ market valuations match TOL’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $229 million. That figure was $239 million in TOL’s case. Eagle Materials, Inc. (NYSE:EXP) is the most popular stock in this table. On the other hand California Water Service Group (NYSE:CWT) is the least popular one with only 16 bullish hedge fund positions. Toll Brothers Inc (NYSE:TOL) is not the least popular stock in this group but hedge fund interest is still below average. 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 TOL as the stock returned 102.4% since the end of March and outperformed the market by an even larger margin.

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