Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With this in mind let’s see whether Office Depot Inc (NYSE:ODP) makes for a good investment at the moment. We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Office Depot Inc (NYSE:ODP) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 16 hedge funds’ portfolios at the end of the fourth quarter of 2019. 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 Tri Continental Corporation (NYSE:TY), Compass Diversified Holdings (NYSE:CODI), and Dycom Industries, Inc. (NYSE:DY) to gather more data points. Our calculations also showed that ODP isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Joshua Friedman of Canyon Capital Advisors
We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. 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 S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the fresh hedge fund action regarding Office Depot Inc (NYSE:ODP).
How are hedge funds trading Office Depot Inc (NASDAQ:ODP)?
At Q4’s end, a total of 16 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ODP over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Canyon Capital Advisors, managed by Joshua Friedman and Mitchell Julis, holds the most valuable position in Office Depot Inc (NASDAQ:ODP). Canyon Capital Advisors has a $71.2 million position in the stock, comprising 1.7% of its 13F portfolio. Coming in second is Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, which holds a $14.8 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Some other members of the smart money with similar optimism comprise Cliff Asness’s AQR Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and Renaissance Technologies. In terms of the portfolio weights assigned to each position Canyon Capital Advisors allocated the biggest weight to Office Depot Inc (NASDAQ:ODP), around 1.66% of its 13F portfolio. Alta Fundamental Advisers is also relatively very bullish on the stock, designating 0.63 percent of its 13F equity portfolio to ODP.
Since Office Depot Inc (NASDAQ:ODP) has faced falling interest from the entirety of the hedge funds we track, it’s easy to see that there lies a certain “tier” of hedgies who sold off their full holdings heading into Q4. Intriguingly, Alec Litowitz and Ross Laser’s Magnetar Capital dropped the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth close to $0.9 million in stock, and Ken Griffin’s Citadel Investment Group was right behind this move, as the fund dropped about $0.9 million worth. These bearish behaviors are important to note, as aggregate 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 Office Depot Inc (NASDAQ:ODP). These stocks are Tri Continental Corporation (NYSE:TY), Compass Diversified Holdings (NYSE:CODI), Dycom Industries, Inc. (NYSE:DY), and Alamo Group, Inc. (NYSE:ALG). All of these stocks’ market caps are similar to ODP’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| TY | 2 | 1464 | 1 |
| CODI | 6 | 7893 | 1 |
| DY | 18 | 92693 | -1 |
| ALG | 7 | 183612 | -4 |
| Average | 8.25 | 71416 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $105 million in ODP’s case. Dycom Industries, Inc. (NYSE:DY) is the most popular stock in this table. On the other hand Tri Continental Corporation (NYSE:TY) is the least popular one with only 2 bullish hedge fund positions. Office Depot Inc (NASDAQ:ODP) 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. 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 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately ODP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ODP were disappointed as the stock returned -26.2% 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
