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Hedge Funds Aren’t Crazy About Mohawk Industries, Inc. (MHK)

In this article you are going to find out whether hedge funds think Mohawk Industries, Inc. (NYSE:MHK) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Mohawk Industries, Inc. (NYSE:MHK) a superb investment right now? The best stock pickers are getting less bullish. The number of long hedge fund bets were cut by 4 lately. Our calculations also showed that MHK isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). MHK was in 36 hedge funds’ portfolios at the end of March. There were 40 hedge funds in our database with MHK holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 51 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Richard Pzena - Pzena Investment Management

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the new hedge fund action surrounding Mohawk Industries, Inc. (NYSE:MHK).

How have hedgies been trading Mohawk Industries, Inc. (NYSE:MHK)?

Heading into the second quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from one quarter earlier. By comparison, 34 hedge funds held shares or bullish call options in MHK a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, Pzena Investment Management was the largest shareholder of Mohawk Industries, Inc. (NYSE:MHK), with a stake worth $158 million reported as of the end of September. Trailing Pzena Investment Management was Eagle Capital Management, which amassed a stake valued at $126.2 million. Ariel Investments, FPR Partners, 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 MD Sass allocated the biggest weight to Mohawk Industries, Inc. (NYSE:MHK), around 3.21% of its 13F portfolio. FPR Partners is also relatively very bullish on the stock, earmarking 2.45 percent of its 13F equity portfolio to MHK.

Because Mohawk Industries, Inc. (NYSE:MHK) has experienced a decline in interest from the smart money, logic holds that there were a few hedge funds that slashed their full holdings in the third quarter. At the top of the heap, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC said goodbye to the biggest position of the “upper crust” of funds followed by Insider Monkey, worth close to $73.3 million in stock, and Renaissance Technologies was right behind this move, as the fund cut about $27.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 4 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Mohawk Industries, Inc. (NYSE:MHK) but similarly valued. We will take a look at Ally Financial Inc (NYSE:ALLY), Whirlpool Corporation (NYSE:WHR), Voya Financial Inc (NYSE:VOYA), and Ascendis Pharma A/S (NASDAQ:ASND). This group of stocks’ market values are similar to MHK’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ALLY 45 931554 -9
WHR 25 567352 -3
VOYA 32 617032 -11
ASND 33 2201133 -5
Average 33.75 1079268 -7

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $1079 million. That figure was $586 million in MHK’s case. Ally Financial Inc (NYSE:ALLY) is the most popular stock in this table. On the other hand Whirlpool Corporation (NYSE:WHR) is the least popular one with only 25 bullish hedge fund positions. Mohawk Industries, Inc. (NYSE:MHK) is not the most popular stock in this group but hedge fund interest is still above average. 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 8.3% in 2020 through the end of May but still beat the market by 13.2 percentage points. Hedge funds were also right about betting on MHK as the stock returned 22.2% in Q2 (through the end of May) 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.