Is Coty Inc (COTY) Going to Burn These Hedge Funds?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Since the end of March, investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned more than 50% since its bottom. In this article you are going to find out whether hedge funds thought Coty Inc (NYSE:COTY) was a good investment heading into the third quarter and how the stock traded in comparison to the top hedge fund picks.

Coty Inc (NYSE:COTY) has experienced a decrease in hedge fund interest recently. Coty Inc (NYSE:COTY) was in 26 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 46. There were 33 hedge funds in our database with COTY positions at the end of the first quarter. Our calculations also showed that COTY 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.

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 56 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.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. 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 website to get excerpts of these letters in your inbox. Now we’re going to review the latest hedge fund action encompassing Coty Inc (NYSE:COTY).

What does smart money think about Coty Inc (NYSE:COTY)?

Heading into the third quarter of 2020, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in COTY over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Coty Inc (NYSE:COTY) was held by Arrowstreet Capital, which reported holding $28.7 million worth of stock at the end of September. It was followed by Contrarius Investment Management with a $28.4 million position. Other investors bullish on the company included JNE Partners, Prentice Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position JNE Partners allocated the biggest weight to Coty Inc (NYSE:COTY), around 20.26% of its 13F portfolio. Prentice Capital Management is also relatively very bullish on the stock, designating 4.65 percent of its 13F equity portfolio to COTY.

Since Coty Inc (NYSE:COTY) has faced falling interest from the aggregate hedge fund industry, it’s safe to say that there were a few funds that slashed their positions entirely heading into Q3. At the top of the heap, Ricky Sandler’s Eminence Capital sold off the biggest stake of all the hedgies followed by Insider Monkey, totaling an estimated $67.1 million in stock. James Woodson Davis’s fund, Woodson Capital Management, also sold off its stock, about $12.4 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 7 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Coty Inc (NYSE:COTY). We will take a look at Seaboard Corporation (NYSE:SEB), Semtech Corporation (NASDAQ:SMTC), Change Healthcare Inc. (NASDAQ:CHNG), NeoGenomics, Inc. (NASDAQ:NEO), bluebird bio Inc (NASDAQ:BLUE), Enstar Group Ltd. (NASDAQ:ESGR), and Rayonier Inc. (NYSE:RYN). All of these stocks’ market caps are closest to COTY’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SEB 14 119011 -1
SMTC 25 157701 8
CHNG 47 1112137 0
NEO 19 65308 8
BLUE 37 388598 10
ESGR 12 329338 1
RYN 17 299169 4
Average 24.4 353037 4.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.4 hedge funds with bullish positions and the average amount invested in these stocks was $353 million. That figure was $135 million in COTY’s case. Change Healthcare Inc. (NASDAQ:CHNG) is the most popular stock in this table. On the other hand Enstar Group Ltd. (NASDAQ:ESGR) is the least popular one with only 12 bullish hedge fund positions. Coty Inc (NYSE:COTY) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for COTY is 35. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately COTY wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on COTY were disappointed as the stock returned -39.6% during the same time period 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 many of these stocks already outperformed the market so far this year.

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