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Tractor Supply Company (TSCO): Are Hedge Funds Right About This Stock?

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 Tractor Supply Company (NASDAQ:TSCO) and determine whether hedge funds skillfully traded this stock.

Is Tractor Supply Company (NASDAQ:TSCO) a marvelous investment now? Money managers were turning less bullish. The number of long hedge fund bets decreased by 7 in recent months. Our calculations also showed that TSCO isn’t 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). TSCO was in 37 hedge funds’ portfolios at the end of the first quarter of 2020. There were 44 hedge funds in our database with TSCO positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

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. 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. With all of this in mind let’s take a gander at the latest hedge fund action regarding Tractor Supply Company (NASDAQ:TSCO).

How are hedge funds trading Tractor Supply Company (NASDAQ:TSCO)?

At Q1’s end, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in TSCO over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is TSCO A Good Stock To Buy?

Among these funds, AQR Capital Management held the most valuable stake in Tractor Supply Company (NASDAQ:TSCO), which was worth $74.4 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $72.5 million worth of shares. Park Presidio Capital, Holocene Advisors, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Park Presidio Capital allocated the biggest weight to Tractor Supply Company (NASDAQ:TSCO), around 8.86% of its 13F portfolio. MIK Capital is also relatively very bullish on the stock, designating 3.92 percent of its 13F equity portfolio to TSCO.

Since Tractor Supply Company (NASDAQ:TSCO) has faced bearish sentiment from the aggregate hedge fund industry, logic holds that there is a sect of hedge funds who sold off their full holdings last quarter. Interestingly, Robert Pohly’s Samlyn Capital said goodbye to the largest stake of the 750 funds followed by Insider Monkey, comprising close to $79 million in stock. James Parsons’s fund, Junto Capital Management, also said goodbye to its stock, about $9.4 million worth. These moves are interesting, as aggregate hedge fund interest fell by 7 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Tractor Supply Company (NASDAQ:TSCO) but similarly valued. These stocks are Teva Pharmaceutical Industries Limited (NYSE:TEVA), Freeport-McMoRan Inc. (NYSE:FCX), Genuine Parts Company (NYSE:GPC), and Hasbro, Inc. (NASDAQ:HAS). All of these stocks’ market caps are similar to TSCO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TEVA 29 866697 6
FCX 42 770016 -13
GPC 22 164418 1
HAS 25 451618 -11
Average 29.5 563187 -4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $563 million. That figure was $510 million in TSCO’s case. Freeport-McMoRan Inc. (NYSE:FCX) is the most popular stock in this table. On the other hand Genuine Parts Company (NYSE:GPC) is the least popular one with only 22 bullish hedge fund positions. Tractor Supply Company (NASDAQ:TSCO) 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on TSCO as the stock returned 56.4% in Q2 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.