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Hedge Funds Think That Capri Holdings Limited (CPRI) Will Bounce Back Soon
With 2024 coming to a close, investors have left several unknown variables behind them. They started out the year wondering when and if the Federal Reserve would start cutting interest rates. Then, as the year progressed, uncertainty about the outcome of the 2024 US Presidential Election came to the forefront due to the significantly different policy objectives of the two candidates.
Now, with President-elect Donald Trump waiting to be sworn in and the Fed's interest rate cut cycle having kicked off in September, Wall Street is now focused on the impact of tariffs on global trade and the speed and depth of the interest rate cutting cycle. After the results of the election were clear, several sectors fluctuated in response.
Since this post is about stocks that can bounce back based on hedge fund holdings, it's relevant to see which stocks tumbled in November. One of the hardest hit sectors was clean energy. The S&P's clean energy stock index lost 10.4% in the days following the election as investors were worried about the rollback of clean energy subsidies rolled out during the Biden Administration and the incoming Trump Administration's focus on traditional energy stocks and oil drilling.
While clean energy as a sector took the hardest hit, other stocks linked to China and the German automotive industry did not do well either. Shares of the Chinese stock that is known to have been a part of Warren Buffett's investment portfolio fell by 4.8%, while shares of German car companies fell by as much as 6.6%. The drops were natural as investors were worried about tariffs against China impacting the car company's business and tariffs against all countries that export to the US hampering the German car industry.
Along with the outcomes of a change in government, investors have also spent 2024 positioning themselves for the Fed's monetary easing. The central bank started its rate cut cycle in September through a jumbo 50 basis point rate cut. In December, investors were greeted by the first set of economic data free of election worries in the form of the consumer price index. The CPI data was a mixed bag of results since while inflation grew at the fastest pace since April, two key inflationary components that have long held up strong against interest rates finally fell.
In numerical terms, US inflation sat at 0.3% in November and 2.7% in the twelve months ending in November. Additionally, core CPI, which removes the impact of volatile food and energy prices from the data, jumped by 0.3% in November to stay at the same level since August. Within this data, rents jumped by 0.2% and decelerated to levels last seen in July 2021. This marked a deceleration over the 0.3% reading for October, and the overall core CPI for the twelve months through November sat at 3.3%. This was lower than the three-month annualized average of 3.7%. This inflation data is crucial as it helps investors determine whether the Federal Reserve will cut interest rates thrice in 2025 or increase the number of cuts to four.
Shifting gears, while artificial intelligence has caught the market and public's attention throughout 2024 and allowed investors to push the broader economic weakness to the background, not all stocks have performed well. Sectors such as oil shipping, biotechnology, industrials, and non-AI information technology have all struggled to impress in 2024. Some stocks, such as this oil tanker firm, are close to 52-week lows as 2024 ends after having lost 26% year-to-date. Sectors like biotechnology, as evidenced by the NASDAQ's index of biotechnology stocks have gained a modest 2.6% year-to-date. Others, such as this Brazilian oil and fuel distribution stock have bled 60% of their value so far in 2024.
It's safe to say that not all sectors of the market have performed well. However, as any prudent investor knows, not all stocks at the bottom of the barrel have to be shunned. Therefore, in this piece, we will look at those stocks that are trading at low levels but attract hefty hedge fund interest during the third quarter.
Our Methodology
To make our list of stocks that can bounce back according to hedge funds, we ranked the 40 most valuable stocks with a market cap greater than $300 million that are down 50% or more year-to-date by the number of hedge funds that had bought the shares in Q3 2024. Out of these, we picked the top ten stocks with the highest number of hedge fund investors.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A glamorous woman with a leather handbag enjoying a shopping experience in an upscale boutique.
Capri Holdings Limited (NYSE:CPRI) is a luxury British apparel brand. This makes it unsurprising that the firm has struggled in 2024, a year characterized by weak consumer spending across the world and weak economic performance in key regions such as Europe and China. The firm operates primarily through its three key brands, Michael Kors, Versace, and Jimmy Choo. As of H1 2024, Michael Kors accounted for 66% of Capri Holdings Limited (NYSE:CPRI)'s sales, while The Americas accounted for 55%. Sales in all regions dropped annually, and the weak performance has also been due to the firm's strategic missteps such as weak implementation of an eCommerce platform for Michael Kors. Capri Holdings Limited (NYSE:CPRI)'s shares sank by a tremendous 46% in October after a deal for it to be acquired by Tapestry fell through and the premium that investors were expecting was priced out. Looking ahead, the firm's hypothesis depends on successful brand execution, a potential split-up, and economic recovery in key regions such as Europe, China, and Japan.
Conventum-Alluvium Global Fund mentioned Capri Holdings Limited (NYSE:CPRI) in its Q3 2024 investor letter. Here is what the fund said:
“As we await the judge’s deliberations in the Federal Trade Commission (FTC) case regarding Tapestry’s acquisition of Capri Holdings Limited (NYSE:CPRI), (up 28.3%) the evidence from Capri’s first quarter earnings release again suggests the fundamentals are weak, particularly in the Michael Kors division (interestingly a point stressed during the FTC hearings). There was no reason to change our Capri analysis, as we had fully factored such weakness after we updated it post the full year results. Tapestry’s results were far more impressive. Tapestry’s management also stressed its commitment to the Capri deal and highlighted that over the prolonged acquisition period (due to the FTC case) it had identified more synergies. Interestingly, whilst we slashed our Capri valuation by 26% last quarter, when we look at the value of Tapestry (on a combined entity basis), and not having any regard for those additional synergies, our valuation has increased as a result of the better than expected core Tapestry earnings stemming from its Coach, Kate Spade and Stuart Weitzman brands.”
Overall CPRI ranks 2nd on our list of the stocks that will bounce back according to hedge funds. While we acknowledge the potential of CPRI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CPRI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
