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Were Hedge Funds Right About Selling Lululemon Athletica (LULU)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. 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 835 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 Lululemon Athletica inc. (NASDAQ:LULU).

Lululemon Athletica inc. (NASDAQ:LULU) has experienced a decrease in enthusiasm from smart money recently. Our calculations also showed that LULU 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).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

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. Now let’s review the fresh hedge fund action regarding Lululemon Athletica inc. (NASDAQ:LULU).

How are hedge funds trading Lululemon Athletica inc. (NASDAQ:LULU)?

At Q4’s end, a total of 47 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in LULU over the last 18 quarters. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

The largest stake in Lululemon Athletica inc. (NASDAQ:LULU) was held by D E Shaw, which reported holding $236.8 million worth of stock at the end of September. It was followed by AQR Capital Management with a $164.1 million position. Other investors bullish on the company included Citadel Investment Group, Arrowstreet Capital, and Marshall Wace LLP. In terms of the portfolio weights assigned to each position Thames Capital Management allocated the biggest weight to Lululemon Athletica inc. (NASDAQ:LULU), around 2.58% of its 13F portfolio. Navellier & Associates is also relatively very bullish on the stock, designating 2.3 percent of its 13F equity portfolio to LULU.

Judging by the fact that Lululemon Athletica inc. (NASDAQ:LULU) has witnessed falling interest from the entirety of the hedge funds we track, it’s safe to say that there was a specific group of fund managers who sold off their entire stakes by the end of the third quarter. At the top of the heap, Gabriel Plotkin’s Melvin Capital Management sold off the biggest stake of the “upper crust” of funds monitored by Insider Monkey, valued at close to $154 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dropped about $42.5 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 5 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks similar to Lululemon Athletica inc. (NASDAQ:LULU). We will take a look at Consolidated Edison, Inc. (NYSE:ED), Equity Residential (NYSE:EQR), TransDigm Group Incorporated (NYSE:TDG), and IQVIA Holdings, Inc. (NYSE:IQV). This group of stocks’ market values resemble LULU’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ED 26 1204354 2
EQR 30 308617 4
TDG 63 5538787 3
IQV 64 3822679 -4
Average 45.75 2718609 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 45.75 hedge funds with bullish positions and the average amount invested in these stocks was $2719 million. That figure was $1133 million in LULU’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand Consolidated Edison, Inc. (NYSE:ED) is the least popular one with only 26 bullish hedge fund positions. Lululemon Athletica inc. (NASDAQ:LULU) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 12.9 percentage points. Hedge funds were also right about betting on LULU, though not to the same extent, as the stock returned -5.6% during the first four months of 2020 (through May 1st) and outperformed the market as well.
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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