Do Hedge Funds Love Urban Outfitters, Inc. (URBN)?

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 Urban Outfitters, Inc. (NASDAQ:URBN) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Urban Outfitters, Inc. (NASDAQ:URBN) investors should pay attention to a decrease in activity from the world’s largest hedge funds recently. Urban Outfitters, Inc. (NASDAQ:URBN) was in 20 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 34. Our calculations also showed that URBN 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.

Ryan Frick Dorsal Capital

Ryan Frick of Dorsal Capital

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 recommended this real estate stock to our monthly premium newsletter subscribers after its stock price crashed. 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. Now let’s review the key hedge fund action encompassing Urban Outfitters, Inc. (NASDAQ:URBN).

How are hedge funds trading Urban Outfitters, Inc. (NASDAQ:URBN)?

Heading into the third quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. On the other hand, there were a total of 21 hedge funds with a bullish position in URBN a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Urban Outfitters, Inc. (NASDAQ:URBN) was held by Arrowstreet Capital, which reported holding $22.4 million worth of stock at the end of September. It was followed by Dorsal Capital Management with a $7.6 million position. Other investors bullish on the company included Point72 Asset Management, Athanor Capital, and Tudor Investment Corp. In terms of the portfolio weights assigned to each position Dorsal Capital Management allocated the biggest weight to Urban Outfitters, Inc. (NASDAQ:URBN), around 0.47% of its 13F portfolio. North Fourth Asset Management is also relatively very bullish on the stock, dishing out 0.17 percent of its 13F equity portfolio to URBN.

Seeing as Urban Outfitters, Inc. (NASDAQ:URBN) has experienced declining sentiment from the smart money, it’s safe to say that there was a specific group of fund managers that slashed their full holdings heading into Q3. At the top of the heap, Ken Griffin’s Citadel Investment Group dropped the largest stake of the “upper crust” of funds watched by Insider Monkey, comprising close to $33.7 million in stock, and Munir Javeri’s 3G Sahana Capital Management was right behind this move, as the fund sold off about $6.6 million worth. These moves are important to note, as total hedge fund interest dropped by 3 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Urban Outfitters, Inc. (NASDAQ:URBN). These stocks are Comfort Systems USA, Inc. (NYSE:FIX), Mueller Water Products, Inc. (NYSE:MWA), Sinclair Broadcast Group, Inc. (NASDAQ:SBGI), Zuora, Inc. (NYSE:ZUO), LTC Properties Inc (NYSE:LTC), Turquoise Hill Resources Ltd (NYSE:TRQ), and Super Micro Computer, Inc. (NASDAQ:SMCI). All of these stocks’ market caps are closest to URBN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FIX 22 80323 2
MWA 21 197650 1
SBGI 24 258240 -1
ZUO 21 104127 -2
LTC 15 18655 4
TRQ 13 268820 -1
SMCI 22 422478 -2
Average 19.7 192899 0.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.7 hedge funds with bullish positions and the average amount invested in these stocks was $193 million. That figure was $55 million in URBN’s case. Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) is the most popular stock in this table. On the other hand Turquoise Hill Resources Ltd (NYSE:TRQ) is the least popular one with only 13 bullish hedge fund positions. Urban Outfitters, Inc. (NASDAQ:URBN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for URBN is 19.6. 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 third quarter and still beat the market by 19.3 percentage points. Hedge funds were also right about betting on URBN as the stock returned 36.7% during Q3 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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