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Hedge Funds Dipping Their Toes Back Into Macy’s, Inc. (M)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Macy’s, Inc. (NYSE:M) and determine whether hedge funds had an edge regarding this stock.

Macy’s, Inc. (NYSE:M) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 67. M investors should pay attention to an increase in support from the world’s most elite money managers recently. There were 30 hedge funds in our database with M positions at the end of the first quarter. Our calculations also showed that M 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.

Donald Yacktman of Yacktman Asset Management

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 precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. With all of this in mind we’re going to analyze the latest hedge fund action regarding Macy’s, Inc. (NYSE:M).

What does smart money think about Macy’s, Inc. (NYSE:M)?

Heading into the third quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in M a year ago. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

Among these funds, Yacktman Asset Management held the most valuable stake in Macy’s, Inc. (NYSE:M), which was worth $233.3 million at the end of the third quarter. On the second spot was Contrarius Investment Management which amassed $63.5 million worth of shares. Arrowstreet Capital, Citadel Investment Group, and AQR Capital Management 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 Contrarius Investment Management allocated the biggest weight to Macy’s, Inc. (NYSE:M), around 6% of its 13F portfolio. Yacktman Asset Management is also relatively very bullish on the stock, earmarking 3.72 percent of its 13F equity portfolio to M.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Steadfast Capital Management, managed by Robert Pitts, assembled the largest position in Macy’s, Inc. (NYSE:M). Steadfast Capital Management had $15.8 million invested in the company at the end of the quarter. Daniel S. Och’s OZ Management also initiated a $8.3 million position during the quarter. The other funds with new positions in the stock are Lee Ainslie’s Maverick Capital, Dmitry Balyasny’s Balyasny Asset Management, and Joe DiMenna’s ZWEIG DIMENNA PARTNERS.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Macy’s, Inc. (NYSE:M) but similarly valued. These stocks are GATX Corporation (NYSE:GATX), Investors Bancorp, Inc. (NASDAQ:ISBC), AMN Healthcare Services Inc (NYSE:AMN), Triton International Limited (NYSE:TRTN), Assured Guaranty Ltd. (NYSE:AGO), Murphy Oil Corporation (NYSE:MUR), and Patterson Companies, Inc. (NASDAQ:PDCO). This group of stocks’ market caps match M’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GATX 17 152806 4
ISBC 25 127448 -1
AMN 21 61749 -1
TRTN 14 44903 2
AGO 25 218746 -3
MUR 15 86330 -5
PDCO 22 126336 5
Average 19.9 116903 0.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.9 hedge funds with bullish positions and the average amount invested in these stocks was $117 million. That figure was $412 million in M’s case. Investors Bancorp, Inc. (NASDAQ:ISBC) is the most popular stock in this table. On the other hand Triton International Limited (NYSE:TRTN) is the least popular one with only 14 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 76.1. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Unfortunately M wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on M were disappointed as the stock returned 1.3% since the end of the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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