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. Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 835 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Papa John’s International, Inc. (NASDAQ:PZZA) in this article.
Papa John’s International, Inc. (NASDAQ:PZZA) has seen an increase in activity from the world’s largest hedge funds recently. PZZA was in 28 hedge funds’ portfolios at the end of December. There were 25 hedge funds in our database with PZZA positions at the end of the previous quarter. Our calculations also showed that PZZA 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.
Ryan Frick of Dorsal Capital
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. Keeping this in mind we’re going to check out the recent hedge fund action surrounding Papa John’s International, Inc. (NASDAQ:PZZA).
Hedge fund activity in Papa John’s International, Inc. (NASDAQ:PZZA)
At the end of the fourth quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in PZZA over the last 18 quarters. With the smart money’s capital changing hands, there exists a few notable hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
Among these funds, Bares Capital Management held the most valuable stake in Papa John’s International, Inc. (NASDAQ:PZZA), which was worth $74.2 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $58 million worth of shares. Dorsal Capital Management, Citadel Investment Group, and Driehaus Capital 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 Stamina Capital Management allocated the biggest weight to Papa John’s International, Inc. (NASDAQ:PZZA), around 10.48% of its 13F portfolio. Litespeed Management is also relatively very bullish on the stock, setting aside 9.25 percent of its 13F equity portfolio to PZZA.
As industrywide interest jumped, key hedge funds were leading the bulls’ herd. Stamina Capital Management, managed by Christopher Weldon, assembled the biggest position in Papa John’s International, Inc. (NASDAQ:PZZA). Stamina Capital Management had $16.8 million invested in the company at the end of the quarter. Mark Coe’s Intrinsic Edge Capital also initiated a $8.8 million position during the quarter. The other funds with brand new PZZA positions are David Harding’s Winton Capital Management, Elise Di Vincenzo Crumbine’s Stormborn Capital Management, and Noam Gottesman’s GLG Partners.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Papa John’s International, Inc. (NASDAQ:PZZA) but similarly valued. We will take a look at The Geo Group, Inc. (NYSE:GEO), Essential Properties Realty Trust, Inc. (NYSE:EPRT), Minerals Technologies Inc (NYSE:MTX), and TransAlta Corporation (NYSE:TAC). All of these stocks’ market caps match PZZA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GEO | 22 | 104432 | -1 |
| EPRT | 9 | 20912 | -7 |
| MTX | 14 | 103244 | -5 |
| TAC | 10 | 47175 | 3 |
| Average | 13.75 | 68941 | -2.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $352 million in PZZA’s case. The Geo Group, Inc. (NYSE:GEO) is the most popular stock in this table. On the other hand Essential Properties Realty Trust, Inc. (NYSE:EPRT) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Papa John’s International, Inc. (NASDAQ:PZZA) is more popular among hedge funds. 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 still managed to beat the market by 4.2 percentage points. Hedge funds were also right about betting on PZZA as the stock returned -9.7% so far in 2020 (through April 6th) 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.
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.
