We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of June. At Insider Monkey, we follow nearly 835 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is Shake Shack Inc (NYSE:SHAK), so let’s take a closer look at the sentiment that surrounds it in the current quarter.
Shake Shack Inc (NYSE:SHAK) has experienced a decrease in enthusiasm from smart money of late. Our calculations also showed that SHAK 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).
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 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 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.
Roberto Mignone of Bridger Management
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 let’s take a look at the recent hedge fund action surrounding Shake Shack Inc (NYSE:SHAK).
How have hedgies been trading Shake Shack Inc (NYSE:SHAK)?
At the end of the fourth quarter, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -14% from the third quarter of 2019. By comparison, 19 hedge funds held shares or bullish call options in SHAK a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, 12 West Capital Management held the most valuable stake in Shake Shack Inc (NYSE:SHAK), which was worth $154.7 million at the end of the third quarter. On the second spot was Eminence Capital which amassed $64.9 million worth of shares. Zevenbergen Capital Investments, Renaissance Technologies, and Bridger Management 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 12 West Capital Management allocated the biggest weight to Shake Shack Inc (NYSE:SHAK), around 9.76% of its 13F portfolio. Stony Point Capital is also relatively very bullish on the stock, setting aside 4.56 percent of its 13F equity portfolio to SHAK.
Judging by the fact that Shake Shack Inc (NYSE:SHAK) has witnessed declining sentiment from the smart money, we can see that there exists a select few funds that elected to cut their positions entirely in the third quarter. It’s worth mentioning that Steve Cohen’s Point72 Asset Management sold off the largest position of the 750 funds tracked by Insider Monkey, worth an estimated $16.1 million in stock, and Joe DiMenna’s ZWEIG DIMENNA PARTNERS was right behind this move, as the fund dropped about $9.7 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds in the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Shake Shack Inc (NYSE:SHAK) but similarly valued. These stocks are PennyMac Mortgage Investment Trust (NYSE:PMT), Verra Mobility Corporation (NASDAQ:VRRM), Turning Point Therapeutics, Inc. (NASDAQ:TPTX), and Trustmark Corp (NASDAQ:TRMK). This group of stocks’ market caps resemble SHAK’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PMT | 19 | 126885 | 4 |
| VRRM | 33 | 300381 | 17 |
| TPTX | 23 | 560633 | 3 |
| TRMK | 16 | 18756 | 1 |
| Average | 22.75 | 251664 | 6.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $252 million. That figure was $343 million in SHAK’s case. Verra Mobility Corporation (NASDAQ:VRRM) is the most popular stock in this table. On the other hand Trustmark Corp (NASDAQ:TRMK) is the least popular one with only 16 bullish hedge fund positions. Shake Shack Inc (NYSE:SHAK) is not the most popular stock in this group but hedge fund interest is still above average. 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 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 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately SHAK wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SHAK were disappointed as the stock returned -36.1% 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 many of these stocks already outperformed the market so far this year.
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.
