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Do Hedge Funds Love The ODP Corporation (ODP)?

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). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. 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 The ODP Corporation (NASDAQ:ODP) at the end of the second quarter and determine whether the smart money was really smart about this stock.

The ODP Corporation (NASDAQ:ODP) has seen an increase in hedge fund sentiment lately. Office Depot Inc (NYSE:ODP) was in 18 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 58. Our calculations also showed that ODP 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.

Josh Friedman Canyon Capital

Joshua Friedman of Canyon Capital Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a look at the recent hedge fund action regarding The ODP Corporation (NASDAQ:ODP).

Hedge fund activity in The ODP Corporation (NASDAQ:ODP)

At the end of June, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 6% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in ODP a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Canyon Capital Advisors held the most valuable stake in The ODP Corporation (NASDAQ:ODP), which was worth $65.1 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $12.3 million worth of shares. Alta Fundamental Advisers, Renaissance Technologies, and AQR Capital Management 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 Alta Fundamental Advisers allocated the biggest weight to The ODP Corporation (NASDAQ:ODP), around 10.19% of its 13F portfolio. Canyon Capital Advisors is also relatively very bullish on the stock, dishing out 2.18 percent of its 13F equity portfolio to ODP.

Consequently, key money managers have been driving this bullishness. Renaissance Technologies, assembled the biggest position in The ODP Corporation (NASDAQ:ODP). Renaissance Technologies had $3.9 million invested in the company at the end of the quarter. Manoj Jain and Sohit Khurana’s Maso Capital also made a $2.9 million investment in the stock during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace’s Marshall Wace LLP, Lee Ainslie’s Maverick Capital, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as The ODP Corporation (NASDAQ:ODP) but similarly valued. These stocks are Coeur Mining, Inc. (NYSE:CDE), Heartland Financial USA Inc (NASDAQ:HTLF), Alexander’s, Inc. (NYSE:ALX), Intellia Therapeutics, Inc. (NASDAQ:NTLA), Vivint Solar Inc (NYSE:VSLR), Getty Realty Corp. (NYSE:GTY), and PBF Energy Inc (NYSE:PBF). This group of stocks’ market caps resemble ODP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CDE 14 48945 0
HTLF 5 6042 -1
ALX 8 96144 0
NTLA 17 63292 7
VSLR 12 59197 -4
GTY 7 72271 -2
PBF 17 95809 -5
Average 11.4 63100 -0.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.4 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $108 million in ODP’s case. Intellia Therapeutics, Inc. (NASDAQ:NTLA) is the most popular stock in this table. On the other hand Heartland Financial USA Inc (NASDAQ:HTLF) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks The ODP Corporation (NASDAQ:ODP) is more popular among hedge funds. Our overall hedge fund sentiment score for ODP is 65.3. 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. 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 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. Unfortunately ODP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ODP were disappointed as the stock returned -17.2% during the third 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.