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The Home Depot, Inc. (HD): Hedge Funds Taking Some Chips Off The Table

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards The Home Depot, Inc. (NYSE:HD) and determine whether hedge funds skillfully traded this stock.

The Home Depot, Inc. (NYSE:HD) has experienced a decrease in hedge fund interest of late. The Home Depot, Inc. (NYSE:HD) was in 85 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 91. There were 87 hedge funds in our database with HD holdings at the end of March. Our calculations also showed that HD 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.

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 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a glance at the latest hedge fund action encompassing The Home Depot, Inc. (NYSE:HD).

Hedge fund activity in The Home Depot, Inc. (NYSE:HD)

At second quarter’s end, a total of 85 of the hedge funds tracked by Insider Monkey were long this stock, a change of -2% from the first quarter of 2020. By comparison, 53 hedge funds held shares or bullish call options in HD a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in The Home Depot, Inc. (NYSE:HD) was held by Fisher Asset Management, which reported holding $1601.1 million worth of stock at the end of September. It was followed by AQR Capital Management with a $513.8 million position. Other investors bullish on the company included Two Sigma Advisors, Citadel Investment Group, and Adage Capital Management. In terms of the portfolio weights assigned to each position Pittencrieff Partners – Gabalex Capital allocated the biggest weight to The Home Depot, Inc. (NYSE:HD), around 7.89% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, earmarking 6.3 percent of its 13F equity portfolio to HD.

Due to the fact that The Home Depot, Inc. (NYSE:HD) has faced declining sentiment from the smart money, it’s easy to see that there is a sect of hedge funds that elected to cut their full holdings heading into Q3. It’s worth mentioning that Alexander Mitchell’s Scopus Asset Management dumped the largest position of the 750 funds tracked by Insider Monkey, valued at an estimated $24.3 million in stock. Mark Kingdon’s fund, Kingdon Capital, also cut its stock, about $15.5 million worth. These transactions are interesting, as total hedge fund interest dropped by 2 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks similar to The Home Depot, Inc. (NYSE:HD). These stocks are Intel Corporation (NASDAQ:INTC), NVIDIA Corporation (NASDAQ:NVDA), Verizon Communications Inc. (NYSE:VZ), AT&T Inc. (NYSE:T), Adobe Inc. (NASDAQ:ADBE), Bank of America Corporation (NYSE:BAC), and Paypal Holdings Inc (NASDAQ:PYPL). All of these stocks’ market caps are closest to HD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INTC 78 6480425 5
NVDA 92 5548398 -3
VZ 68 2973925 0
T 57 1659928 0
ADBE 104 9651462 -11
BAC 91 24357766 -4
PYPL 144 11406883 26
Average 90.6 8868398 1.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 90.6 hedge funds with bullish positions and the average amount invested in these stocks was $8868 million. That figure was $4643 million in HD’s case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand AT&T Inc. (NYSE:T) is the least popular one with only 57 bullish hedge fund positions. The Home Depot, Inc. (NYSE:HD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HD is 47.1. 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. 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 28.2% in 2020 through August 24th and still beat the market by 20.6 percentage points. A small number of hedge funds were also right about betting on HD as the stock returned 14.5% since the end of June and outperformed the market by an even larger margin.

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