Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Is StoneCo Ltd. (NASDAQ:STNE) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.
StoneCo Ltd. (NASDAQ:STNE) investors should be aware of an increase in activity from the world’s largest hedge funds lately. Our calculations also showed that STNE isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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.
Warren Buffett of Berkshire Hathaway
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. With all of this in mind we’re going to take a peek at the fresh hedge fund action regarding StoneCo Ltd. (NASDAQ:STNE).
What does smart money think about StoneCo Ltd. (NASDAQ:STNE)?
At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the third quarter of 2019. By comparison, 20 hedge funds held shares or bullish call options in STNE 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.
The largest stake in StoneCo Ltd. (NASDAQ:STNE) was held by Berkshire Hathaway, which reported holding $565.1 million worth of stock at the end of September. It was followed by Maverick Capital with a $169.2 million position. Other investors bullish on the company included Whale Rock Capital Management, Steadfast Capital Management, and Coatue Management. In terms of the portfolio weights assigned to each position Cartica Management allocated the biggest weight to StoneCo Ltd. (NASDAQ:STNE), around 29.95% of its 13F portfolio. Marcho Partners is also relatively very bullish on the stock, earmarking 8.65 percent of its 13F equity portfolio to STNE.
Consequently, specific money managers were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, created the most valuable position in StoneCo Ltd. (NASDAQ:STNE). Point72 Asset Management had $32.1 million invested in the company at the end of the quarter. Carl Anderson’s Marcho Partners also made a $12.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Donald Sussman’s Paloma Partners, Karim Abbadi and Edward McBride’s Centiva Capital, and Frank Slattery’s Symmetry Peak Management.
Let’s now review hedge fund activity in other stocks similar to StoneCo Ltd. (NASDAQ:STNE). These stocks are Elanco Animal Health Incorporated (NYSE:ELAN), LKQ Corporation (NASDAQ:LKQ), Avery Dennison Corporation (NYSE:AVY), and Medical Properties Trust, Inc. (NYSE:MPW). This group of stocks’ market caps resemble STNE’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ELAN | 23 | 620585 | -4 |
| LKQ | 52 | 1559414 | 9 |
| AVY | 22 | 105570 | -3 |
| MPW | 14 | 186041 | 2 |
| Average | 27.75 | 617903 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $618 million. That figure was $1475 million in STNE’s case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Medical Properties Trust, Inc. (NYSE:MPW) is the least popular one with only 14 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. 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 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately STNE wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on STNE were disappointed as the stock returned -34% 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.
Disclosure: None. This article was originally published at Insider Monkey.
