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Were Hedge Funds Right About L Brands Inc (LB)?

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is L Brands Inc (NYSE:LB) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Is L Brands Inc (NYSE:LB) the right pick for your portfolio? Investors who are in the know are getting more bullish. The number of bullish hedge fund positions went up by 7 recently. Our calculations also showed that LB isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). LB was in 46 hedge funds’ portfolios at the end of December. There were 39 hedge funds in our database with LB holdings at the end of the previous quarter.

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 41 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.

Ricky Sandler of Eminence Capital

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s go over the new hedge fund action encompassing L Brands Inc (NYSE:LB).

Hedge fund activity in L Brands Inc (NYSE:LB)

At the end of the fourth quarter, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 18% from one quarter earlier. On the other hand, there were a total of 35 hedge funds with a bullish position in LB a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Eminence Capital held the most valuable stake in L Brands Inc (NYSE:LB), which was worth $105.6 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $88.1 million worth of shares. Contrarius Investment Management, D E Shaw, and Millennium Management 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 Barington Capital Group allocated the biggest weight to L Brands Inc (NYSE:LB), around 12.23% of its 13F portfolio. Kettle Hill Capital Management is also relatively very bullish on the stock, setting aside 8.04 percent of its 13F equity portfolio to LB.

As industrywide interest jumped, key money managers have been driving this bullishness. Eminence Capital, managed by Ricky Sandler, assembled the most outsized position in L Brands Inc (NYSE:LB). Eminence Capital had $105.6 million invested in the company at the end of the quarter. Andrew Kurita’s Kettle Hill Capital Management also initiated a $31.9 million position during the quarter. The following funds were also among the new LB investors: Amir Mokari’s Emerson Point Capital, James Parsons’s Junto Capital Management, and Gregg Moskowitz’s Interval Partners.

Let’s now take a look at hedge fund activity in other stocks similar to L Brands Inc (NYSE:LB). These stocks are Integra Lifesciences Holdings Corp (NASDAQ:IART), Blackstone Mortgage Trust Inc (NYSE:BXMT), Axis Capital Holdings Limited (NYSE:AXS), and Portland General Electric Company (NYSE:POR). This group of 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
IART 17 115558 -6
BXMT 15 64533 -2
AXS 34 942398 2
POR 27 408157 0
Average 23.25 382662 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $383 million. That figure was $681 million in LB’s case. Axis Capital Holdings Limited (NYSE:AXS) is the most popular stock in this table. On the other hand Blackstone Mortgage Trust Inc (NYSE:BXMT) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks L Brands Inc (NYSE:LB) is more popular among hedge funds. 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 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately LB wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on LB were disappointed as the stock returned -33% during the four months of 2020 (through May 1st) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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