The volatility in the equity markets in the past two months caused by deteriorating macros has taken a toll on the stocks of a lot of companies, regardless of the sectors these companies operate in. In situations like these when macro economic factors take precedence over the underlying fundamentals of a stock, it becomes difficult for investors to pick individual stocks and also to hold on to their conviction in stocks they already own. To help out investors in their stock selection in the current environment, Goldman Sachs Group Inc (NYSE:GS) recently published a list of the top 25 stocks with the highest dispersion scores which are also rated by the investment bank as having strong upside potential. According to the firm, the dispersion scores “reflect a combination of each stock’s sensitivity to company-specific fundamentals and risk. Names with high dispersion scores are much more likely to react to firm-specific developments versus the macro environment“. In this article we are going to look at five of these stocks from Goldman’s list and discuss what the hedge funds covered by us think about them.
Hedge funds have been underperforming the market for a very long time. However, this was mainly because of the huge fees that hedge funds charge as well as the poor performance of their short books. Hedge funds’ long positions performed actually better than the market. Small-cap stocks, activist targets, and spin offs were among the bright spots in hedge funds’ portfolios. For instance, the 15 most popular small-cap stocks among hedge funds outperformed the market by more than 60 percentage points since the end of August 2012, returning 118% (read the details here). This strategy also managed to beat the market by double digits annually in our back tests covering the 1999-2012 period.
5. Urban Outfitters, Inc. (NASDAQ:URBN)
Investors with Long Positions (as of June 30): 28
Aggregate Value of Investors’ Holdings (as of June 30): $266.82 Million
Let’s start with lifestyle retailer Urban Outfitters, Inc. (NASDAQ:URBN), which has an upside potential of 34% to Goldman’s price target and a dispersion score of 3.5. Although the stock of Urban Outfitters, Inc. (NASDAQ:URBN) has gradually declined since April, which included losing 23.3% during the second quarter, the number of hedge funds covered by us that disclosed a stake in the company came down by only one during that period. However, the aggregate value of hedge funds’ holdings in the company during the same period saw a significant decline of 34.18%. Even though the domestic apparel industry is seeing a slowdown in growth, Urban Outfitters has been growing steadily over the past five years and industry experts feel that this growth will continue thanks to its international operations, which are growing much more rapidly than its domestic operations. Lee Munder‘s Lee Munder Capital Group initiated a stake in the company during the second quarter, buying 219,653 shares.