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The Home Depot, Inc. (HD): Were Hedge Funds Right About This Stock?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded The Home Depot, Inc. (NYSE:HD) and determine whether the smart money was really smart about this stock.

The Home Depot, Inc. (NYSE:HD) has seen a decrease in activity from the world’s largest hedge funds of late. Our calculations also showed that HD ranked 29th among the 30 most popular stocks among hedge funds (click for Q1 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 the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Mark Kingdon - Kingdon Capital

Mark Kingdon of Kingdon Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a gander at the fresh hedge fund action surrounding The Home Depot, Inc. (NYSE:HD).

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

Heading into the second quarter of 2020, a total of 87 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HD over the last 18 quarters. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

The largest stake in The Home Depot, Inc. (NYSE:HD) was held by Fisher Asset Management, which reported holding $1159 million worth of stock at the end of September. It was followed by AQR Capital Management with a $442.3 million position. Other investors bullish on the company included Two Sigma Advisors, D E Shaw, and Citadel Investment Group. 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 6.43% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, earmarking 5.59 percent of its 13F equity portfolio to HD.

Seeing as The Home Depot, Inc. (NYSE:HD) has witnessed a decline in interest from the smart money, logic holds that there was a specific group of funds that decided to sell off their positions entirely in the first quarter. Intriguingly, Tim Hurd and Ed Magnus’s BlueSpruce Investments said goodbye to the biggest position of the 750 funds monitored by Insider Monkey, comprising about $124.2 million in stock, and Gregg Moskowitz’s Interval Partners was right behind this move, as the fund dropped about $54.4 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 4 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to The Home Depot, Inc. (NYSE:HD). We will take a look at Merck & Co., Inc. (NYSE:MRK), The Coca-Cola Company (NYSE:KO), Novartis AG (NYSE:NVS), and Bank of America Corporation (NYSE:BAC). All of these stocks’ market caps match HD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MRK 78 5025553 1
KO 55 19901708 4
NVS 30 2034578 0
BAC 95 21721713 -4
Average 64.5 12170888 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 64.5 hedge funds with bullish positions and the average amount invested in these stocks was $12171 million. That figure was $3586 million in HD’s case. Bank of America Corporation (NYSE:BAC) is the most popular stock in this table. On the other hand Novartis AG (NYSE:NVS) is the least popular one with only 30 bullish hedge fund positions. The Home Depot, Inc. (NYSE:HD) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on HD as the stock returned 32.2% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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