Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like TopBuild Corp (NYSE:BLD).
TopBuild Corp (NYSE:BLD) was in 17 hedge funds’ portfolios at the end of the third quarter of 2019. BLD has seen an increase in hedge fund sentiment of late. There were 14 hedge funds in our database with BLD positions at the end of the previous quarter. Our calculations also showed that BLD isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Israel Englander of Millennium Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. Let’s analyze the key hedge fund action encompassing TopBuild Corp (NYSE:BLD).
How have hedgies been trading TopBuild Corp (NYSE:BLD)?
At the end of the third quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 21% from the second quarter of 2019. On the other hand, there were a total of 18 hedge funds with a bullish position in BLD a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Millennium Management, managed by Israel Englander, holds the number one position in TopBuild Corp (NYSE:BLD). Millennium Management has a $34.6 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is David Brown of Hawk Ridge Management, with a $21.4 million position; the fund has 4.3% of its 13F portfolio invested in the stock. Some other professional money managers that are bullish contain Ken Griffin’s Citadel Investment Group, Joel Greenblatt’s Gotham Asset Management and Matthew Hulsizer’s PEAK6 Capital Management. In terms of the portfolio weights assigned to each position Hawk Ridge Management allocated the biggest weight to TopBuild Corp (NYSE:BLD), around 4.29% of its 13F portfolio. Lodge Hill Capital is also relatively very bullish on the stock, designating 1.67 percent of its 13F equity portfolio to BLD.
As aggregate interest increased, key money managers have been driving this bullishness. Renaissance Technologies, established the biggest position in TopBuild Corp (NYSE:BLD). Renaissance Technologies had $5.7 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $3.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Cliff Asness’s AQR Capital Management and Bruce Kovner’s Caxton Associates.
Let’s go over hedge fund activity in other stocks similar to TopBuild Corp (NYSE:BLD). We will take a look at Legg Mason, Inc. (NYSE:LM), The Timken Company (NYSE:TKR), Cedar Fair, L.P. (NYSE:FUN), and ICU Medical, Inc. (NASDAQ:ICUI). All of these stocks’ market caps are closest to BLD’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LM | 25 | 466189 | 7 |
| TKR | 26 | 208170 | 0 |
| FUN | 13 | 99639 | 5 |
| ICUI | 15 | 234605 | 0 |
| Average | 19.75 | 252151 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $252 million. That figure was $123 million in BLD’s case. The Timken Company (NYSE:TKR) is the most popular stock in this table. On the other hand Cedar Fair, L.P. (NYSE:FUN) is the least popular one with only 13 bullish hedge fund positions. TopBuild Corp (NYSE:BLD) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on BLD as the stock returned 14.4% during the first two months of Q4 and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
