Takeover Or Not, You Should See What Hedge Funds Think About Chico’s FAS

As the stocks on the US stock market have been trading lower on Monday, a number of companies have been gaining ground. Among them, the stock of Chico’s FAS, Inc. (NYSE:CHS), a $2.0 billion apparel retailer, has advanced by some 9.40% so far today, on the back of a Bloomberg report that the company might be heading to being taken private by several equity buyers including Sycamore Partners. The source, citing people familiar with the matter, said that Chico’s FAS is working with Peter J. Solomon, an investment bank, to assess its options. Sycamore tried to acquire the company in February, but the parties could not agree on financing.

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As the rumors have not been officially confirmed or rejected by Chico’s FAS, Inc. (NYSE:CHS), it’s important to see whether smart money investors have anticipated such a development. We will do that further on in this article, but until then we should mention why we think that hedge fund sentiment is an important metric to follow. We analyze the 13F filings of more than 700 hedge funds, because our research has shown that some of their most popular long positions can help piggybackers outrun the market. Through extensive backtests that covered the period between 1999 and 2012, we determined that most popular picks among hedge funds, underperformed the S&P 500 Total Return Index by around seven basis points per month on average. This was mainly because these picks were represented by widely-followed companies, which are more efficiently priced. On the other hand, their top small-cap ideas beat the benchmark by some 95 basis points per month. Based on this results, in August 2012 we launched our small-cap strategy, which involves imitating 15 most popular small-cap stocks among hedge funds, and which has returned some 118% since then, beating the S&P 500 ETF (SPY) by more than 60 percentage points (read more details here).

In this way, when it comes to analyzing how hedge funds have been trading Chico’s FAS, Inc. (NYSE:CHS), we can see from both the overall data and by assessing some particular investors that are bullish on the company that they don’t bet on the company being acquired. However, they consider that the company has a long-term potential. Between April and June, the number of funds with long positions in Chico’s FAS, Inc. (NYSE:CHS) declined to 19 from 26, while the total value of their holdings slid to $366.26 million from $468.16 million a quarter earlier. Nevertheless, at the end of June, funds from our database held over 15% of the company, which suggests that overall hedge funds are overweight the stock.

A closer look shows that at the end of June, Clifton S. Robbins‘s Blue Harbour Group held the largest stake in Chico’s FAS among the funds we track, reporting ownership of 9.82 million shares, down by 7% on the quarter. On the other hand, the second-largest shareholder, Joel Greenblatt’s Gotham Asset Management, increased its holding by a threefold to 2.88 million shares. However, while in Blue Harbour’s equity portfolio, the position in Chico’s FAS, Inc. (NYSE:CHS) amasses 4.80% of the total value, Gotham allocated only 0.4% of its portfolio to its position in the company. Moreover, Kenneth Squire‘s 13D Management, which generally invests in companies targeted by activists, inched up its position by a quarterly 13% to 630,800 shares.

In this way, until there is some certainty regarding a transaction involving Chico’s FAS, Inc. (NYSE:CHS), it looks like investors might have rushed to fast to bet on it. However, the hedge fund sentiment suggests that even if a deal does not take place, the company has a long-term potential. Analysts seem to have the same opinion, as earlier this month, FBR & Co. reiterated its ‘Buy’ rating on the stock with a $20 price target.

Disclosure: none