Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.
Is Sanderson Farms, Inc. (NASDAQ:SAFM) undervalued? The smart money is taking a pessimistic view at the margin. The number of long hedge fund positions shrunk by 1 recently. Our calculations also showed that SAFM isn’t among the 30 most popular stocks among hedge funds (see the video below). SAFM was in 20 hedge funds’ portfolios at the end of the second quarter of 2019. There were 21 hedge funds in our database with SAFM holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We’re going to take a look at 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 second quarter, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from one quarter earlier. On the other hand, there were a total of 15 hedge funds with a bullish position in SAFM a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Renaissance Technologies was the largest shareholder of Sanderson Farms, Inc. (NASDAQ:SAFM), with a stake worth $128.2 million reported as of the end of March. Trailing Renaissance Technologies was Citadel Investment Group, which amassed a stake valued at $96.8 million. D E Shaw, Highline Capital Management, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that Sanderson Farms, Inc. (NASDAQ:SAFM) has faced declining sentiment from the smart money, logic holds that there was a specific group of hedge funds who sold off their entire stakes in the second quarter. At the top of the heap, Ricky Sandler’s Eminence Capital cut the biggest investment of the 750 funds monitored by Insider Monkey, worth close to $73.6 million in stock. Dmitry Balyasny’s fund, Balyasny Asset Management, also said goodbye to its stock, about $30 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds in the second quarter.
Let’s now review hedge fund activity in other stocks similar to Sanderson Farms, Inc. (NASDAQ:SAFM). We will take a look at Sensient Technologies Corporation (NYSE:SXT), Cosan Limited (NYSE:CZZ), Liberty Latin America Ltd. (NASDAQ:LILA), and MorphoSys AG (NASDAQ:MOR). This group of stocks’ market valuations resemble SAFM’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SXT | 12 | 52368 | 4 |
| CZZ | 15 | 174422 | -1 |
| LILA | 11 | 144973 | -3 |
| MOR | 6 | 37770 | -1 |
| Average | 11 | 102383 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11 hedge funds with bullish positions and the average amount invested in these stocks was $102 million. That figure was $449 million in SAFM’s case. Cosan Limited (NYSE:CZZ) is the most popular stock in this table. On the other hand MorphoSys AG (NASDAQ:MOR) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Sanderson Farms, Inc. (NASDAQ:SAFM) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on SAFM as the stock returned 11.3% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
