Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors’ favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds’ top consensus picks. This year hedge funds’ top 20 stock picks outperformed the S&P 500 Index by 9.9 percentage points through the end of November. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
Is United Natural Foods, Inc. (NYSE:UNFI) a good investment today? The smart money is selling. The number of long hedge fund positions were trimmed by 4 in recent months. Our calculations also showed that UNFI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Andy Redleaf of Whitebox Advisors
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a glance at the key hedge fund action encompassing United Natural Foods, Inc. (NYSE:UNFI).
What have hedge funds been doing with United Natural Foods, Inc. (NYSE:UNFI)?
Heading into the fourth quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -29% from the second quarter of 2019. By comparison, 21 hedge funds held shares or bullish call options in UNFI a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in United Natural Foods, Inc. (NYSE:UNFI), which was worth $10.9 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $8.6 million worth of shares. Valueworks LLC, Redwood Capital Management, and GAMCO Investors 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 Valueworks LLC allocated the biggest weight to United Natural Foods, Inc. (NYSE:UNFI), around 5.49% of its 13F portfolio. Redwood Capital Management is also relatively very bullish on the stock, setting aside 0.47 percent of its 13F equity portfolio to UNFI.
Judging by the fact that United Natural Foods, Inc. (NYSE:UNFI) has witnessed falling interest from the aggregate hedge fund industry, we can see that there were a few hedgies who were dropping their positions entirely last quarter. It’s worth mentioning that Israel Englander’s Millennium Management cut the largest stake of all the hedgies followed by Insider Monkey, valued at about $2.6 million in stock. Chuck Royce’s fund, Royce & Associates, also said goodbye to its stock, about $1.6 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 4 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as United Natural Foods, Inc. (NYSE:UNFI) but similarly valued. We will take a look at Agilysys, Inc. (NASDAQ:AGYS), United Insurance Holdings Corp. (NASDAQ:UIHC), Huami Corporation (NYSE:HMI), and Koppers Holdings Inc. (NYSE:KOP). This group of stocks’ market caps are similar to UNFI’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AGYS | 16 | 128890 | 3 |
| UIHC | 11 | 13753 | 3 |
| HMI | 4 | 6091 | -2 |
| KOP | 13 | 40987 | 1 |
| Average | 11 | 47430 | 1.25 |
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 $47 million. That figure was $35 million in UNFI’s case. Agilysys, Inc. (NASDAQ:AGYS) is the most popular stock in this table. On the other hand Huami Corporation (NYSE:HMI) is the least popular one with only 4 bullish hedge fund positions. United Natural Foods, Inc. (NYSE:UNFI) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately UNFI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); UNFI investors were disappointed as the stock returned -20.8% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
