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. Keeping this in mind, let’s take a look at whether TreeHouse Foods Inc. (NYSE:THS) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is TreeHouse Foods Inc. (NYSE:THS) a marvelous investment right now? Prominent investors are getting more optimistic. The number of bullish hedge fund positions improved by 8 lately. Our calculations also showed that THS 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). THS was in 27 hedge funds’ portfolios at the end of December. There were 19 hedge funds in our database with THS positions at the end of the previous quarter.
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.
Philippe Laffont of Coatue Management
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. Keeping this in mind let’s go over the new hedge fund action encompassing TreeHouse Foods Inc. (NYSE:THS).
How are hedge funds trading TreeHouse Foods Inc. (NYSE:THS)?
At Q4’s end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 42% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in THS over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Among these funds, Levin Easterly Partners held the most valuable stake in TreeHouse Foods Inc. (NYSE:THS), which was worth $153.1 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $16.9 million worth of shares. Millennium Management, AQR Capital Management, and Balyasny Asset 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 Levin Easterly Partners allocated the biggest weight to TreeHouse Foods Inc. (NYSE:THS), around 4.3% of its 13F portfolio. Ancora Advisors is also relatively very bullish on the stock, earmarking 0.29 percent of its 13F equity portfolio to THS.
With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. First Pacific Advisors LLC, managed by Robert Rodriguez and Steven Romick, established the most valuable position in TreeHouse Foods Inc. (NYSE:THS). First Pacific Advisors LLC had $2.5 million invested in the company at the end of the quarter. Philippe Laffont’s Coatue Management also made a $1.2 million investment in the stock during the quarter. The following funds were also among the new THS investors: Benjamin A. Smith’s Laurion Capital Management, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Philip Hempleman’s Ardsley Partners.
Let’s go over hedge fund activity in other stocks similar to TreeHouse Foods Inc. (NYSE:THS). These stocks are American Equity Investment Life Holding (NYSE:AEL), Extended Stay America Inc (NASDAQ:STAY), Urban Outfitters, Inc. (NASDAQ:URBN), and The Simply Good Foods Company (NASDAQ:SMPL). This group of stocks’ market values are similar to THS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| AEL | 17 | 89434 | -2 |
| STAY | 35 | 496027 | 8 |
| URBN | 34 | 170783 | 0 |
| SMPL | 34 | 242325 | 12 |
| Average | 30 | 249642 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $250 million. That figure was $238 million in THS’s case. Extended Stay America Inc (NASDAQ:STAY) is the most popular stock in this table. On the other hand American Equity Investment Life Holding (NYSE:AEL) is the least popular one with only 17 bullish hedge fund positions. TreeHouse Foods Inc. (NYSE:THS) is not the least popular stock in this group but hedge fund interest is still below average. 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on THS, though not to the same extent, as the stock returned -21.8% during the same time period and outperformed the market.
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.
