Were Hedge Funds Right About Dumping Coty Inc (COTY)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money 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 (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Coty Inc (NYSE:COTY).

Coty Inc (NYSE:COTY) was in 19 hedge funds’ portfolios at the end of June. COTY investors should pay attention to a decrease in support from the world’s most elite money managers in recent months. There were 24 hedge funds in our database with COTY holdings at the end of the previous quarter. Our calculations also showed that COTY isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Mark Kingdon - Kingdon Capital

Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to view the key hedge fund action encompassing Coty Inc (NYSE:COTY).

What does smart money think about Coty Inc (NYSE:COTY)?

Heading into the third quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from the previous quarter. The graph below displays the number of hedge funds with bullish position in COTY over the last 16 quarters. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).


More specifically, Balyasny Asset Management was the largest shareholder of Coty Inc (NYSE:COTY), with a stake worth $40.1 million reported as of the end of March. Trailing Balyasny Asset Management was Kingdon Capital, which amassed a stake valued at $22.2 million. Winton Capital Management, D E Shaw, and Woodson Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Coty Inc (NYSE:COTY) has experienced bearish sentiment from hedge fund managers, logic holds that there lies a certain “tier” of funds who were dropping their entire stakes by the end of the second quarter. Interestingly, Michael A. Price and Amos Meron’s Empyrean Capital Partners dropped the largest investment of all the hedgies followed by Insider Monkey, comprising an estimated $51.8 million in stock. Ric Dillon’s fund, Diamond Hill Capital, also dumped its stock, about $38.8 million worth. These transactions are interesting, as total hedge fund interest dropped by 5 funds by the end of the second quarter.

Let’s now review hedge fund activity in other stocks similar to Coty Inc (NYSE:COTY). These stocks are Grupo Aval Acciones y Valores S.A. (NYSE:AVAL), NICE Ltd. (NASDAQ:NICE), Aspen Technology, Inc. (NASDAQ:AZPN), and F5 Networks, Inc. (NASDAQ:FFIV). This group of stocks’ market values resemble COTY’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AVAL 7 19032 -1
NICE 19 381690 2
AZPN 26 1272257 1
FFIV 23 1083984 -1
Average 18.75 689241 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $689 million. That figure was $150 million in COTY’s case. Aspen Technology, Inc. (NASDAQ:AZPN) is the most popular stock in this table. On the other hand Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) is the least popular one with only 7 bullish hedge fund positions. Coty Inc (NYSE:COTY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately COTY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on COTY were disappointed as the stock returned -20.6% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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