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Do Hedge Funds Love Constellation Brands, Inc. (STZ)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought Constellation Brands, Inc. (NYSE:STZ) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

Constellation Brands, Inc. (NYSE:STZ) investors should pay attention to an increase in hedge fund sentiment recently. Constellation Brands, Inc. (NYSE:STZ) was in 53 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 71. Our calculations also showed that STZ isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

Michael Lowenstein Kensico Capital

Michael Lowenstein of Kensico Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America 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 let’s analyze the recent hedge fund action encompassing Constellation Brands, Inc. (NYSE:STZ).

How are hedge funds trading Constellation Brands, Inc. (NYSE:STZ)?

At second quarter’s end, a total of 53 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the previous quarter. By comparison, 38 hedge funds held shares or bullish call options in STZ a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

The largest stake in Constellation Brands, Inc. (NYSE:STZ) was held by Kensico Capital, which reported holding $768.4 million worth of stock at the end of September. It was followed by Palestra Capital Management with a $223.9 million position. Other investors bullish on the company included Two Creeks Capital Management, Gates Capital Management, and Candlestick Capital Management. In terms of the portfolio weights assigned to each position Kensico Capital allocated the biggest weight to Constellation Brands, Inc. (NYSE:STZ), around 16.12% of its 13F portfolio. BlueDrive Global Investors is also relatively very bullish on the stock, setting aside 10.05 percent of its 13F equity portfolio to STZ.

As aggregate interest increased, key money managers were leading the bulls’ herd. BlueDrive Global Investors, managed by Oscar Hattink, assembled the biggest position in Constellation Brands, Inc. (NYSE:STZ). BlueDrive Global Investors had $29.7 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $20.5 million position during the quarter. The following funds were also among the new STZ investors: Matthew Hulsizer’s PEAK6 Capital Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Greg Poole’s Echo Street Capital Management.

Let’s check out hedge fund activity in other stocks similar to Constellation Brands, Inc. (NYSE:STZ). These stocks are Thomson Reuters Corporation (NYSE:TRI), Banco Bradesco SA (NYSE:BBD), Public Storage (NYSE:PSA), SBA Communications Corporation (NASDAQ:SBAC), Metlife Inc (NYSE:MET), Xcel Energy Inc (NASDAQ:XEL), and HCA Healthcare Inc (NYSE:HCA). This group of stocks’ market valuations are closest to STZ’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TRI 25 440519 3
BBD 18 235952 3
PSA 26 712541 -1
SBAC 57 2165651 11
MET 31 970822 -3
XEL 23 273421 -1
HCA 71 2240096 -16
Average 35.9 1005572 -0.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.9 hedge funds with bullish positions and the average amount invested in these stocks was $1006 million. That figure was $1653 million in STZ’s case. HCA Healthcare Inc (NYSE:HCA) is the most popular stock in this table. On the other hand Banco Bradesco SA (NYSE:BBD) is the least popular one with only 18 bullish hedge fund positions. Constellation Brands, Inc. (NYSE:STZ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for STZ is 63.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately STZ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on STZ were disappointed as the stock returned 5.9% during the same time period 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 many of these stocks already outperformed the market so far this year.

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