Hedge Funds Are Buying StoneCo Ltd. (STNE)

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in StoneCo Ltd. (NASDAQ:STNE)? The smart money sentiment can provide an answer to this question.

StoneCo Ltd. (NASDAQ:STNE) was in 44 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 47. STNE shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. There were 39 hedge funds in our database with STNE positions at the end of the first quarter. Our calculations also showed that STNE isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Daniel Sundheim of D1 Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now let’s take a look at the recent hedge fund action regarding StoneCo Ltd. (NASDAQ:STNE).

Do Hedge Funds Think STNE Is A Good Stock To Buy Now?

At the end of June, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards STNE over the last 24 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Warren Buffett’s Berkshire Hathaway has the most valuable position in StoneCo Ltd. (NASDAQ:STNE), worth close to $717.2 million, comprising 0.2% of its total 13F portfolio. Sitting at the No. 2 spot is Lone Pine Capital, with a $593.2 million position; 1.9% of its 13F portfolio is allocated to the company. Remaining members of the smart money with similar optimism consist of Eashwar Krishnan’s Tybourne Capital Management, John Armitage’s Egerton Capital Limited and Daniel Sundheim’s D1 Capital Partners. In terms of the portfolio weights assigned to each position ROAM Global Management allocated the biggest weight to StoneCo Ltd. (NASDAQ:STNE), around 8.53% of its 13F portfolio. Castle Hook Partners is also relatively very bullish on the stock, earmarking 5.75 percent of its 13F equity portfolio to STNE.

Now, key money managers have jumped into StoneCo Ltd. (NASDAQ:STNE) headfirst. D1 Capital Partners, managed by Daniel Sundheim, initiated the most outsized position in StoneCo Ltd. (NASDAQ:STNE). D1 Capital Partners had $129.8 million invested in the company at the end of the quarter. Catherine D. Wood’s ARK Investment Management also made a $39.3 million investment in the stock during the quarter. The following funds were also among the new STNE investors: Teresa Barger’s Cartica Management, James Crichton’s Hitchwood Capital Management, and Jeff Lignelli’s Incline Global Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as StoneCo Ltd. (NASDAQ:STNE) but similarly valued. These stocks are Avantor, Inc. (NYSE:AVTR), Halliburton Company (NYSE:HAL), Take-Two Interactive Software, Inc. (NASDAQ:TTWO), Steris Plc (NYSE:STE), Trimble Inc. (NASDAQ:TRMB), Ingersoll Rand Inc. (NYSE:IR), and Ameren Corporation (NYSE:AEE). This group of stocks’ market valuations are closest to STNE’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.9 hedge funds with bullish positions and the average amount invested in these stocks was $1357 million. That figure was $2740 million in STNE’s case. Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is the most popular stock in this table. On the other hand Ameren Corporation (NYSE:AEE) is the least popular one with only 23 bullish hedge fund positions. StoneCo Ltd. (NASDAQ:STNE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for STNE is 70.9. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 22.9% in 2021 through October 1st and beat the market again by 5.6 percentage points. Unfortunately STNE wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on STNE were disappointed as the stock returned -47.2% since the end of June (through 10/1) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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

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