Hedge Funds Are Buying L Brands Inc (LB)

The fourth quarter was a rough one for most investors, as fears of a rising interest rate environment in the U.S, a trade war with China, and a more or less stagnant Europe, weighed heavily on the minds of investors. Both the S&P 500 and Russell 2000 sank as a result, with the Russell 2000, which is composed of smaller companies, being hit especially hard. This was primarily due to hedge funds, which are big supporters of small-cap stocks, pulling some of their capital out of the volatile markets during this time. Let’s look at how this market volatility affected the sentiment of hedge funds towards L Brands Inc (NYSE:LB), and what that likely means for the prospects of the company and its stock.

L Brands Inc (NYSE:LB) was in 27 hedge funds’ portfolios at the end of September. LB has seen an increase in hedge fund interest recently. There were 25 hedge funds in our database with LB positions at the end of the previous quarter. Our calculations also showed that lb isn’t among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Thomas Bancroft - Makaira Partners

We’re going to view the key hedge fund action regarding L Brands Inc (NYSE:LB).

How are hedge funds trading L Brands Inc (NYSE:LB)?

At Q3’s end, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 8% from one quarter earlier. On the other hand, there were a total of 29 hedge funds with a bullish position in LB at the beginning of this year. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

No of Hedge Funds with LB Positions

More specifically, Makaira Partners was the largest shareholder of L Brands Inc (NYSE:LB), with a stake worth $114.1 million reported as of the end of September. Trailing Makaira Partners was Balyasny Asset Management, which amassed a stake valued at $78.7 million. SRS Investment Management, Okumus Fund Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls’ herd. Arlington Value Capital, managed by Allan Mecham and Ben Raybould, assembled the largest position in L Brands Inc (NYSE:LB). Arlington Value Capital had $51.6 million invested in the company at the end of the quarter. Anand Parekh’s Alyeska Investment Group also initiated a $37.1 million position during the quarter. The following funds were also among the new LB investors: John Tompkins’s Tyvor Capital, James A. Mitarotonda’s Barington Capital Group, and Elise Di Vincenzo Crumbine’s Stormborn Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as L Brands Inc (NYSE:LB) but similarly valued. These stocks are Brown & Brown, Inc. (NYSE:BRO), DocuSign, Inc. (NASDAQ:DOCU), Fluor Corporation (NYSE:FLR), and Guidewire Software Inc (NYSE:GWRE). This group of stocks’ market valuations match LB’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BRO 22 715848 0
DOCU 37 582881 17
FLR 23 367123 1
GWRE 32 464652 14
Average 28.5 532626 8

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.5 hedge funds with bullish positions and the average amount invested in these stocks was $533 million. That figure was $685 million in LB’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand Brown & Brown, Inc. (NYSE:BRO) is the least popular one with only 22 bullish hedge fund positions. L Brands Inc (NYSE:LB) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard DOCU might be a better candidate to consider a long position.

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