Hedge Funds Are Nibbling On Macy’s, Inc. (M)

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Macy’s, Inc. (NYSE:M)? The smart money sentiment can provide an answer to this question.

Macy’s, Inc. (NYSE:M) was in 35 hedge funds’ portfolios at the end of June. The all time high for this statistic is 67. M has experienced an increase in hedge fund interest lately. There were 31 hedge funds in our database with M holdings at the end of March. Our calculations also showed that M isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind we’re going to take a look at the new hedge fund action regarding Macy’s, Inc. (NYSE:M).

Do Hedge Funds Think M Is A Good Stock To Buy Now?

At second quarter’s end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from the first quarter of 2020. By comparison, 36 hedge funds held shares or bullish call options in M a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

The largest stake in Macy’s, Inc. (NYSE:M) was held by GoldenTree Asset Management, which reported holding $177.5 million worth of stock at the end of June. It was followed by Yacktman Asset Management with a $157.1 million position. Other investors bullish on the company included Arrowstreet Capital, Two Sigma Advisors, and Contrarius Investment Management. In terms of the portfolio weights assigned to each position GoldenTree Asset Management allocated the biggest weight to Macy’s, Inc. (NYSE:M), around 4.71% of its 13F portfolio. Contrarius Investment Management is also relatively very bullish on the stock, earmarking 4.71 percent of its 13F equity portfolio to M.

As one would reasonably expect, key hedge funds were breaking ground themselves. GoldenTree Asset Management, managed by Steven Tananbaum, assembled the biggest call position in Macy’s, Inc. (NYSE:M). GoldenTree Asset Management had $177.5 million invested in the company at the end of the quarter. Gabriel Plotkin’s Melvin Capital Management also initiated a $47.4 million position during the quarter. The other funds with brand new M positions are Steven Tananbaum’s GoldenTree Asset Management, Michael Zimmerman’s Prentice Capital Management, and Paul Marshall and Ian Wace’s Marshall Wace LLP.

Let’s also examine hedge fund activity in other stocks similar to Macy’s, Inc. (NYSE:M). We will take a look at Douglas Emmett, Inc. (NYSE:DEI), Huntsman Corporation (NYSE:HUN), Valvoline Inc. (NYSE:VVV), Clover Health Investments, Corp. (NASDAQ:CLOV), Hutchison China MediTech Limited (NASDAQ:HCM), Descartes Systems Group (NASDAQ:DSGX), and Healthcare Trust Of America Inc (NYSE:HTA). All of these stocks’ market caps are closest to M’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.4 hedge funds with bullish positions and the average amount invested in these stocks was $514 million. That figure was $1023 million in M’s case. Huntsman Corporation (NYSE:HUN) is the most popular stock in this table. On the other hand Hutchison China MediTech Limited (NASDAQ:HCM) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Macy’s, Inc. (NYSE:M) is more popular among hedge funds. Our overall hedge fund sentiment score for M is 74.7. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 21.8% in 2021 through October 11th but still managed to beat the market by 4.4 percentage points. Hedge funds were also right about betting on M as the stock returned 18% since the end of June (through 10/11) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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