Were Hedge Funds Right About Flocking Into Stitch Fix, Inc. (SFIX) ?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Stitch Fix, Inc. (NASDAQ:SFIX)? The smart money sentiment can provide an answer to this question.

Is Stitch Fix, Inc. (NASDAQ:SFIX) going to take off soon? The smart money is turning bullish. The number of long hedge fund bets went up by 7 lately. Our calculations also showed that sfix isn’t among the 30 most popular stocks among hedge funds. SFIX was in 27 hedge funds’ portfolios at the end of March. There were 20 hedge funds in our database with SFIX positions at the end of the previous 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 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 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.

Glen Kacher Light Street

Let’s take a peek at the latest hedge fund action regarding Stitch Fix, Inc. (NASDAQ:SFIX).

What have hedge funds been doing with Stitch Fix, Inc. (NASDAQ:SFIX)?

Heading into the second quarter of 2019, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 35% from the fourth quarter of 2018. On the other hand, there were a total of 9 hedge funds with a bullish position in SFIX a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

No of Hedge Funds with SFIX Positions

More specifically, Steadfast Capital Management was the largest shareholder of Stitch Fix, Inc. (NASDAQ:SFIX), with a stake worth $54.2 million reported as of the end of March. Trailing Steadfast Capital Management was Park West Asset Management, which amassed a stake valued at $33 million. D E Shaw, Light Street Capital, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, key money managers have been driving this bullishness. D E Shaw, managed by D. E. Shaw, established the biggest position in Stitch Fix, Inc. (NASDAQ:SFIX). D E Shaw had $20 million invested in the company at the end of the quarter. Josh Tarasoff’s Greenlea Lane Capital also made a $7.1 million investment in the stock during the quarter. The other funds with brand new SFIX positions are Peter S. Park’s Park West Asset Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, and Nick Thakore’s Diametric Capital.

Let’s go over hedge fund activity in other stocks similar to Stitch Fix, Inc. (NASDAQ:SFIX). We will take a look at Delek US Holdings, Inc. (NYSE:DK), MakeMyTrip Limited (NASDAQ:MMYT), Range Resources Corp. (NYSE:RRC), and The Descartes Systems Group Inc (NASDAQ:DSGX). All of these stocks’ market caps match SFIX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DK 28 144251 1
MMYT 12 70388 1
RRC 31 886310 0
DSGX 10 80866 -2
Average 20.25 295454 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $295 million. That figure was $173 million in SFIX’s case. Range Resources Corp. (NYSE:RRC) is the most popular stock in this table. On the other hand The Descartes Systems Group Inc (NASDAQ:DSGX) is the least popular one with only 10 bullish hedge fund positions. Stitch Fix, Inc. (NASDAQ:SFIX) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately SFIX wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SFIX were disappointed as the stock returned -16.7% during the same period 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 13 of these stocks already outperformed the market so far in Q2.

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