Was The Smart Money Right About Best Buy Co., Inc. (BBY)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Best Buy Co., Inc. (NYSE:BBY).

Is Best Buy Co., Inc. (NYSE:BBY) a bargain? The smart money was selling. The number of bullish hedge fund bets were cut by 4 lately. Best Buy Co., Inc. (NYSE:BBY) was in 33 hedge funds’ portfolios at the end of June. The all time high for this statistics is 40. Our calculations also showed that BBY 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). There were 37 hedge funds in our database with BBY positions at the end of the first 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 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 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. 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. With all of this in mind we’re going to go over the latest hedge fund action regarding Best Buy Co., Inc. (NYSE:BBY).

Hedge fund activity in Best Buy Co., Inc. (NYSE:BBY)

At second quarter’s end, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the first quarter of 2020. On the other hand, there were a total of 31 hedge funds with a bullish position in BBY 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.

Of the funds tracked by Insider Monkey, Cliff Asness’s AQR Capital Management has the number one position in Best Buy Co., Inc. (NYSE:BBY), worth close to $406.5 million, corresponding to 0.7% of its total 13F portfolio. On AQR Capital Management’s heels is John Overdeck and David Siegel of Two Sigma Advisors, with a $134.3 million position; the fund has 0.4% of its 13F portfolio invested in the stock. Remaining members of the smart money with similar optimism consist of Ken Griffin’s Citadel Investment Group, Renaissance Technologies and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position MIK Capital allocated the biggest weight to Best Buy Co., Inc. (NYSE:BBY), around 3.08% of its 13F portfolio. L2 Asset Management is also relatively very bullish on the stock, dishing out 2.67 percent of its 13F equity portfolio to BBY.

Seeing as Best Buy Co., Inc. (NYSE:BBY) has faced bearish sentiment from hedge fund managers, it’s safe to say that there was a specific group of hedge funds who sold off their positions entirely in the second quarter. Intriguingly, Alexander Mitchell’s Scopus Asset Management dropped the largest investment of the 750 funds monitored by Insider Monkey, valued at about $10.6 million in stock. Brad Stephens’s fund, Six Columns Capital, also said goodbye to its stock, about $4.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 4 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Best Buy Co., Inc. (NYSE:BBY) but similarly valued. We will take a look at State Street Corporation (NYSE:STT), BioMarin Pharmaceutical Inc. (NASDAQ:BMRN), Fortinet Inc (NASDAQ:FTNT), Archer Daniels Midland Company (NYSE:ADM), Palo Alto Networks Inc (NYSE:PANW), Genmab A/S (NASDAQ:GMAB), and Dollar Tree, Inc. (NASDAQ:DLTR). All of these stocks’ market caps are similar to BBY’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.9 hedge funds with bullish positions and the average amount invested in these stocks was $1599 million. That figure was $1063 million in BBY’s case. Dollar Tree, Inc. (NASDAQ:DLTR) is the most popular stock in this table. On the other hand Genmab A/S (NASDAQ:GMAB) is the least popular one with only 15 bullish hedge fund positions. Best Buy Co., Inc. (NYSE:BBY) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for BBY is 45.8. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. A small number of hedge funds were also right about betting on BBY as the stock returned 28.5% since the end of the second quarter (through 10/30) and outperformed the market by an even larger margin.

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