Was The Smart Money Right About Piling Into L Brands (LB)?

In this article we are going to use hedge fund sentiment as a tool and determine whether L Brands Inc (NYSE:LB) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is L Brands Inc (NYSE:LB) ready to rally soon? Prominent investors were becoming hopeful. The number of bullish hedge fund bets moved up by 7 in recent months. L Brands Inc (NYSE:LB) was in 52 hedge funds’ portfolios at the end of December. The all time high for this statistic was previously 46. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LB isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 45 hedge funds in our database with LB positions at the end of the third quarter.

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 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 124 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.

John Armitage Egerton Capital

John Armitage of Egerton Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let’s view the key hedge fund action regarding L Brands Inc (NYSE:LB).

Do Hedge Funds Think LB Is A Good Stock To Buy Now?

At the end of December, a total of 52 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 16% from the third quarter of 2020. The graph below displays the number of hedge funds with bullish position in LB over the last 22 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Lone Pine Capital, holds the biggest position in L Brands Inc (NYSE:LB). Lone Pine Capital has a $976.8 million position in the stock, comprising 3.6% of its 13F portfolio. The second largest stake is held by Gabriel Plotkin of Melvin Capital Management, with a $731.3 million position; the fund has 3.2% of its 13F portfolio invested in the stock. Other peers that are bullish consist of John Armitage’s Egerton Capital Limited, Philippe Laffont’s Coatue Management and Robert Pitts’s Steadfast Capital Management. In terms of the portfolio weights assigned to each position Barington Capital Group allocated the biggest weight to L Brands Inc (NYSE:LB), around 26.95% of its 13F portfolio. Makaira Partners is also relatively very bullish on the stock, setting aside 15.82 percent of its 13F equity portfolio to LB.

As industrywide interest jumped, key money managers were leading the bulls’ herd. Junto Capital Management, managed by James Parsons, initiated the largest position in L Brands Inc (NYSE:LB). Junto Capital Management had $22.8 million invested in the company at the end of the quarter. Joe DiMenna’s ZWEIG DIMENNA PARTNERS also made a $20.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Brad Stephens’s Six Columns Capital, Joseph Samuels’s Islet Management, and Richard Schimel and Lawrence Sapanski’s Cinctive Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as L Brands Inc (NYSE:LB) but similarly valued. We will take a look at Host Hotels and Resorts Inc (NASDAQ:HST), Banco de Chile (NYSE:BCH), ICON Public Limited Company (NASDAQ:ICLR), China Eastern Airlines Corp. Ltd. (NYSE:CEA), The Toro Company (NYSE:TTC), Anaplan, Inc. (NYSE:PLAN), and CBOE Global Markets Inc (NASDAQ:CBOE). All of these stocks’ market caps are similar to LB’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HST 22 127294 1
BCH 3 48096 -1
ICLR 29 646187 5
CEA 1 1005 1
TTC 31 1004514 -1
PLAN 63 3062296 8
CBOE 38 859817 5
Average 26.7 821316 2.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $821 million. That figure was $3909 million in LB’s case. Anaplan, Inc. (NYSE:PLAN) is the most popular stock in this table. On the other hand China Eastern Airlines Corp. Ltd. (NYSE:CEA) is the least popular one with only 1 bullish hedge fund positions. L Brands Inc (NYSE:LB) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LB is 81.1. 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 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on LB as the stock returned 77.2% since the end of Q4 (through 4/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Follow Bath & Body Works Inc. (NYSE:BBWI)

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