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Ralph Lauren Corporation (RL) Is Falling Out Of Favor With Hedge Funds

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 Ralph Lauren Corporation (NYSE:RL) and determine whether hedge funds had an edge regarding this stock.

Ralph Lauren Corporation (NYSE:RL) has seen a decrease in enthusiasm from smart money of late. Ralph Lauren Corporation (NYSE:RL) was in 25 hedge funds’ portfolios at the end of June. The all time high for this statistics is 39. Our calculations also showed that RL 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.

In today’s marketplace there are dozens of metrics market participants can use to analyze stocks. A pair of the best metrics are hedge fund and insider trading activity. We have shown that, historically, those who follow the best picks of the best hedge fund managers can outclass their index-focused peers by a very impressive amount (see the details here).

Dmitry Balyasny of Balyasny Asset Managemnet

Dmitry Balyasny of Balyasny Asset 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. Keeping this in mind we’re going to analyze the fresh hedge fund action surrounding Ralph Lauren Corporation (NYSE:RL).

Hedge fund activity in Ralph Lauren Corporation (NYSE:RL)

At the end of the second quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the first quarter of 2020. By comparison, 35 hedge funds held shares or bullish call options in RL a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is RL A Good Stock To Buy?

The largest stake in Ralph Lauren Corporation (NYSE:RL) was held by Renaissance Technologies, which reported holding $273.4 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $55.9 million position. Other investors bullish on the company included Yacktman Asset Management, AQR Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position Yacktman Asset Management allocated the biggest weight to Ralph Lauren Corporation (NYSE:RL), around 0.86% of its 13F portfolio. TwinBeech Capital is also relatively very bullish on the stock, earmarking 0.41 percent of its 13F equity portfolio to RL.

Due to the fact that Ralph Lauren Corporation (NYSE:RL) has faced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there exists a select few funds who sold off their full holdings last quarter. At the top of the heap, Edgar Wachenheim’s Greenhaven Associates cut the biggest investment of the 750 funds tracked by Insider Monkey, comprising about $7.1 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also dropped its stock, about $1.6 million worth. These moves are interesting, as aggregate hedge fund interest fell by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Ralph Lauren Corporation (NYSE:RL) but similarly valued. These stocks are Ares Management Corp (NYSE:ARES), Churchill Downs Incorporated (NASDAQ:CHDN), Sonoco Products Company (NYSE:SON), First Solar, Inc. (NASDAQ:FSLR), Reata Pharmaceuticals, Inc. (NASDAQ:RETA), Planet Fitness Inc (NYSE:PLNT), and CubeSmart (NYSE:CUBE). All of these stocks’ market caps resemble RL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ARES 20 448658 4
CHDN 25 470037 -6
SON 25 128777 2
FSLR 16 68174 -6
RETA 34 439815 1
PLNT 44 1253736 0
CUBE 24 211307 6
Average 26.9 431501 0.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.9 hedge funds with bullish positions and the average amount invested in these stocks was $432 million. That figure was $500 million in RL’s case. Planet Fitness Inc (NYSE:PLNT) is the most popular stock in this table. On the other hand First Solar, Inc. (NASDAQ:FSLR) is the least popular one with only 16 bullish hedge fund positions. Ralph Lauren Corporation (NYSE:RL) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for RL is 39.3. 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 negative signal and 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 surpassed the market by 17.7 percentage points. Unfortunately RL wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RL investors were disappointed as the stock returned -2% since Q2 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.