Did Hedge Funds Make The Right Call On Sanderson Farms, Inc. (SAFM) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtSanderson Farms, Inc. (NASDAQ:SAFM) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Sanderson Farms, Inc. (NASDAQ:SAFM) has seen a decrease in hedge fund interest in recent months. SAFM was in 17 hedge funds’ portfolios at the end of the first quarter of 2020. There were 36 hedge funds in our database with SAFM positions at the end of the previous quarter. Our calculations also showed that SAFM isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Sander Gerber of Hudson Bay Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let’s review the key hedge fund action encompassing Sanderson Farms, Inc. (NASDAQ:SAFM).

Hedge fund activity in Sanderson Farms, Inc. (NASDAQ:SAFM)

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -53% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SAFM over the last 18 quarters. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies has the biggest position in Sanderson Farms, Inc. (NASDAQ:SAFM), worth close to $86.7 million, accounting for 0.1% of its total 13F portfolio. Coming in second is Jack Woodruff of Candlestick Capital Management, with a $66.9 million position; 2.8% of its 13F portfolio is allocated to the stock. Other peers with similar optimism contain Phill Gross and Robert Atchinson’s Adage Capital Management, Ken Griffin’s Citadel Investment Group and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Candlestick Capital Management allocated the biggest weight to Sanderson Farms, Inc. (NASDAQ:SAFM), around 2.82% of its 13F portfolio. Centenus Global Management is also relatively very bullish on the stock, designating 1.13 percent of its 13F equity portfolio to SAFM.

Judging by the fact that Sanderson Farms, Inc. (NASDAQ:SAFM) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of hedgies that slashed their entire stakes in the first quarter. At the top of the heap, Jacob Doft’s Highline Capital Management dumped the biggest stake of the “upper crust” of funds followed by Insider Monkey, comprising about $34.8 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also dumped its stock, about $32.8 million worth. These moves are important to note, as total hedge fund interest was cut by 19 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Sanderson Farms, Inc. (NASDAQ:SAFM) but similarly valued. We will take a look at GW Pharmaceuticals plc (NASDAQ:GWPH), Schrodinger, Inc. (NASDAQ:SDGR), H&R Block, Inc. (NYSE:HRB), and Murphy USA Inc. (NYSE:MUSA). All of these stocks’ market caps resemble SAFM’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $295 million. That figure was $330 million in SAFM’s case. Murphy USA Inc. (NYSE:MUSA) is the most popular stock in this table. On the other hand Schrodinger, Inc. (NASDAQ:SDGR) is the least popular one with only 15 bullish hedge fund positions. Sanderson Farms, Inc. (NASDAQ:SAFM) 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 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately SAFM wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SAFM investors were disappointed as the stock returned -9.2% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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