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Hedge Fund Consensus Stocks vs. The Home Depot, Inc. (HD) In 2019

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves. In this article, we look at what those funds think of The Home Depot, Inc. (NYSE:HD) based on that data.

The Home Depot, Inc. (NYSE:HD) has experienced an increase in hedge fund sentiment in recent months. HD was in 60 hedge funds’ portfolios at the end of the third quarter of 2019. There were 53 hedge funds in our database with HD holdings at the end of the previous quarter. Our calculations also showed that HD isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jeffrey Talpins of Element Capital

We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now we’re going to analyze the key hedge fund action surrounding The Home Depot, Inc. (NYSE:HD).

What does smart money think about The Home Depot, Inc. (NYSE:HD)?

At the end of the third quarter, a total of 60 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HD over the last 17 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

Among these funds, Fisher Asset Management held the most valuable stake in The Home Depot, Inc. (NYSE:HD), which was worth $1423.5 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $463.3 million worth of shares. AQR Capital Management, Adage Capital Management, and Arrowstreet Capital 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 Chilton Investment Company allocated the biggest weight to The Home Depot, Inc. (NYSE:HD), around 5.95% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, dishing out 5.6 percent of its 13F equity portfolio to HD.

Consequently, specific money managers have been driving this bullishness. Junto Capital Management, managed by James Parsons, established the most valuable position in The Home Depot, Inc. (NYSE:HD). Junto Capital Management had $63.1 million invested in the company at the end of the quarter. Kenneth Tropin’s Graham Capital Management also made a $7 million investment in the stock during the quarter. The other funds with brand new HD positions are Jeffrey Talpins’s Element Capital Management, Parvinder Thiara’s Athanor Capital, and Donald Sussman’s Paloma Partners.

Let’s go over hedge fund activity in other stocks similar to The Home Depot, Inc. (NYSE:HD). We will take a look at Verizon Communications Inc. (NYSE:VZ), Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), The Walt Disney Company (NYSE:DIS), and Royal Dutch Shell plc (NYSE:RDS). This group of stocks’ market valuations are similar to HD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
VZ 56 2373783 2
TSM 52 5161771 10
DIS 105 4233957 -8
RDS 29 1386135 -5
Average 60.5 3288912 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 60.5 hedge funds with bullish positions and the average amount invested in these stocks was $3289 million. That figure was $4350 million in HD’s case. The Walt Disney Company (NYSE:DIS) is the most popular stock in this table. On the other hand Royal Dutch Shell plc (NYSE:RDS) is the least popular one with only 29 bullish hedge fund positions. The Home Depot, Inc. (NYSE:HD) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. A small number of hedge funds were also right about betting on HD, though not to the same extent, as the stock returned 31.1% in 2019 (as of 12/23) and outperformed the market.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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