Were Hedge Funds Right About Embracing Chewy, Inc. (CHWY)?

Reymerlyn Martin
·6 min read

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Chewy, Inc. (NYSE:CHWY).

Is Chewy, Inc. (NYSE:CHWY) ready to rally soon? Prominent investors were getting more optimistic. The number of bullish hedge fund positions increased by 8 recently. Chewy, Inc. (NYSE:CHWY) was in 44 hedge funds' portfolios at the end of June. The all time high for this statistics is 38. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that CHWY isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 36 hedge funds in our database with CHWY positions at the end of the first quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Chase Coleman of Tiger Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let's take a peek at the new hedge fund action encompassing Chewy, Inc. (NYSE:CHWY).

Hedge fund activity in Chewy, Inc. (NYSE:CHWY)

At Q2's end, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 22% from the previous quarter. By comparison, 38 hedge funds held shares or bullish call options in CHWY a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, Tybourne Capital Management held the most valuable stake in Chewy, Inc. (NYSE:CHWY), which was worth $127.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $91.2 million worth of shares. Zevenbergen Capital Investments, Samlyn Capital, and Tiger Global Management LLC 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 Berylson Capital Partners allocated the biggest weight to Chewy, Inc. (NYSE:CHWY), around 6.82% of its 13F portfolio. Rip Road Capital is also relatively very bullish on the stock, dishing out 4.96 percent of its 13F equity portfolio to CHWY.

As industrywide interest jumped, key money managers have jumped into Chewy, Inc. (NYSE:CHWY) headfirst. Samlyn Capital, managed by Robert Pohly, initiated the largest position in Chewy, Inc. (NYSE:CHWY). Samlyn Capital had $44.3 million invested in the company at the end of the quarter. Glen Kacher's Light Street Capital also initiated a $22.1 million position during the quarter. The following funds were also among the new CHWY investors: Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Traci Lerner's Chescapmanager LLC, and James Thomas Berylson's Berylson Capital Partners.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Chewy, Inc. (NYSE:CHWY) but similarly valued. These stocks are Delta Air Lines, Inc. (NYSE:DAL), Fortis Inc. (NYSE:FTS), PG&E Corporation (NYSE:PCG), Slack Technologies Inc (NYSE:WORK), Akamai Technologies, Inc. (NASDAQ:AKAM), Ameren Corporation (NYSE:AEE), and Interactive Brokers Group, Inc. (NASDAQ:IBKR). This group of stocks' market values are closest to CHWY's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DAL,39,864778,-14 FTS,8,379313,-7 PCG,92,4871702,44 WORK,32,287493,1 AKAM,40,548791,0 AEE,19,474360,-2 IBKR,32,695740,10 Average,37.4,1160311,4.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.4 hedge funds with bullish positions and the average amount invested in these stocks was $1160 million. That figure was $570 million in CHWY's case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Fortis Inc. (NYSE:FTS) is the least popular one with only 8 bullish hedge fund positions. Chewy, Inc. (NYSE:CHWY) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CHWY is 61.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on CHWY as the stock returned 42.4% since the end of Q2 (through 10/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Get real-time email alerts: Follow Chewy Inc. (NYSE:CHWY)

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

Related Content