Were Hedge Funds Right About Souring On D.R. Horton, Inc. (DHI)?

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 (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is D.R. Horton, Inc. (NYSE:DHI), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

D.R. Horton, Inc. (NYSE:DHI) was in 51 hedge funds’ portfolios at the end of December. DHI has seen a decrease in support from the world’s most elite money managers recently. There were 59 hedge funds in our database with DHI positions at the end of the previous quarter. Our calculations also showed that DHI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below 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.

John Armitage Egerton Capital

John Armitage of Egerton Capital

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. Keeping this in mind let’s take a gander at the recent hedge fund action encompassing D.R. Horton, Inc. (NYSE:DHI).

How are hedge funds trading D.R. Horton, Inc. (NYSE:DHI)?

At the end of the fourth quarter, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DHI over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Egerton Capital Limited held the most valuable stake in D.R. Horton, Inc. (NYSE:DHI), which was worth $511.7 million at the end of the third quarter. On the second spot was Long Pond Capital which amassed $462 million worth of shares. Greenhaven Associates, AQR Capital Management, and Two Sigma Advisors 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 Long Pond Capital allocated the biggest weight to D.R. Horton, Inc. (NYSE:DHI), around 11.8% of its 13F portfolio. Akaris Global Partners is also relatively very bullish on the stock, setting aside 10.49 percent of its 13F equity portfolio to DHI.

Because D.R. Horton, Inc. (NYSE:DHI) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there exists a select few fund managers that elected to cut their positions entirely by the end of the third quarter. Intriguingly, Lone Pine Capital sold off the biggest position of the “upper crust” of funds tracked by Insider Monkey, totaling close to $175.7 million in stock, and Aaron Cowen’s Suvretta Capital Management was right behind this move, as the fund dropped about $157.6 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 8 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks similar to D.R. Horton, Inc. (NYSE:DHI). These stocks are Interactive Brokers Group, Inc. (NASDAQ:IBKR), Ryanair Holdings plc (NASDAQ:RYAAY), Mettler-Toledo International Inc. (NYSE:MTD), and The Clorox Company (NYSE:CLX). All of these stocks’ market caps are similar to DHI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IBKR 29 886155 4
RYAAY 22 829569 0
MTD 29 560946 4
CLX 27 864420 -10
Average 26.75 785273 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $785 million. That figure was $2241 million in DHI’s case. Interactive Brokers Group, Inc. (NASDAQ:IBKR) is the most popular stock in this table. On the other hand Ryanair Holdings plc (NASDAQ:RYAAY) is the least popular one with only 22 bullish hedge fund positions. Compared to these stocks D.R. Horton, Inc. (NYSE:DHI) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th and still beat the market by 3.2 percentage points. Unfortunately DHI wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DHI were disappointed as the stock returned -40.4% during the first two and a half months of 2020 (through March 16th) 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 most of these stocks already outperformed the market in Q1.

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.