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Were Hedge Funds Right About Warming Up To Acuity Brands, Inc. (AYI)?

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. Keeping this in mind, let’s analyze whether Acuity Brands, Inc. (NYSE:AYI) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Acuity Brands, Inc. (NYSE:AYI) was in 29 hedge funds’ portfolios at the end of the fourth quarter of 2019. AYI investors should be aware of an increase in support from the world’s most elite money managers of late. There were 28 hedge funds in our database with AYI holdings at the end of the previous quarter. Our calculations also showed that AYI 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).

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 was 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’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.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

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. Now we’re going to take a peek at the key hedge fund action regarding Acuity Brands, Inc. (NYSE:AYI).

Hedge fund activity in Acuity Brands, Inc. (NYSE:AYI)

At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in AYI over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Generation Investment Management was the largest shareholder of Acuity Brands, Inc. (NYSE:AYI), with a stake worth $267.1 million reported as of the end of September. Trailing Generation Investment Management was International Value Advisers, which amassed a stake valued at $172.8 million. Renaissance Technologies, AQR Capital Management, and D E Shaw 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 International Value Advisers allocated the biggest weight to Acuity Brands, Inc. (NYSE:AYI), around 7.08% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, setting aside 1.71 percent of its 13F equity portfolio to AYI.

As one would reasonably expect, specific money managers have been driving this bullishness. Adage Capital Management, managed by Phill Gross and Robert Atchinson, initiated the most outsized position in Acuity Brands, Inc. (NYSE:AYI). Adage Capital Management had $17.7 million invested in the company at the end of the quarter. Bruce Kovner’s Caxton Associates LP also initiated a $2.1 million position during the quarter. The other funds with new positions in the stock are Ray Dalio’s Bridgewater Associates, David Harding’s Winton Capital Management, and Peter Algert and Kevin Coldiron’s Algert Coldiron Investors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Acuity Brands, Inc. (NYSE:AYI) but similarly valued. These stocks are Churchill Downs Incorporated (NASDAQ:CHDN), Huntsman Corporation (NYSE:HUN), NewMarket Corporation (NYSE:NEU), and Marriott Vacations Worldwide Corporation (NYSE:VAC). This group of stocks’ market caps match AYI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHDN 32 599421 6
HUN 39 401253 8
NEU 22 195365 -7
VAC 25 512208 -5
Average 29.5 427062 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $427 million. That figure was $822 million in AYI’s case. Huntsman Corporation (NYSE:HUN) is the most popular stock in this table. On the other hand NewMarket Corporation (NYSE:NEU) is the least popular one with only 22 bullish hedge fund positions. Acuity Brands, Inc. (NYSE:AYI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately AYI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AYI investors were disappointed as the stock returned -41.1% during the same time 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 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.

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