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Is RH (RH) Going to Burn These Hedge Funds?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards RH (NYSE:RH).

Hedge fund interest in RH (NYSE:RH) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Tenet Healthcare Corp (NYSE:THC), Belden Inc. (NYSE:BDC), and Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) to gather more data points.

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 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 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.

Dmitry Balyasny

We’re going to take a peek at the key hedge fund action encompassing RH (NYSE:RH).

Hedge fund activity in RH (NYSE:RH)

At Q3’s end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, no change from one quarter earlier. On the other hand, there were a total of 24 hedge funds with a bullish position in RH at the beginning of this year. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

RH_dec2018

Among these funds, Nantahala Capital Management held the most valuable stake in RH (NYSE:RH), which was worth $78.1 million at the end of the third quarter. On the second spot was Balyasny Asset Management which amassed $72.9 million worth of shares. Moreover, Millennium Management, Citadel Investment Group, and Scopus Asset Management were also bullish on RH (NYSE:RH), allocating a large percentage of their portfolios to this stock.

Since RH (NYSE:RH) has experienced declining sentiment from the smart money, we can see that there lies a certain “tier” of hedge funds that elected to cut their entire stakes heading into Q3. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dropped the biggest position of all the hedgies monitored by Insider Monkey, valued at an estimated $85.6 million in stock. D. E. Shaw’s fund, D E Shaw, also cut its stock, about $43 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to RH (NYSE:RH). We will take a look at Tenet Healthcare Corp (NYSE:THC), Belden Inc. (NYSE:BDC), Sinclair Broadcast Group, Inc. (NASDAQ:SBGI), and Adtalem Global Education Inc. (NYSE:ATGE). This group of stocks’ market valuations resemble RH’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
THC 28 945450 -1
BDC 10 12010 -1
SBGI 31 568387 -2
ATGE 16 210396 2
Average 21.25 434061 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $434 million. That figure was $411 million in RH’s case. Sinclair Broadcast Group, Inc. (NASDAQ:SBGI) is the most popular stock in this table. On the other hand Belden Inc. (NYSE:BDC) is the least popular one with only 10 bullish hedge fund positions. RH (NYSE:RH) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard SBGI might be a better candidate to consider a long position.

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

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