Hedge Funds Like The Moves This International Consumer Staples Giant Is Making

Reuters is reporting that Mondelez International Inc (NASDAQ:MDLZ) is exploring a sale of its European grocery and cheese business, which could sell for as much as $3 billion. Investors speculate that Kraft Heinz Co (NASDAQ:KHC) and large private equity firms could be buyers in the transaction. Shares of Mondelez are moderately higher in afternoon trading. Let’s take a closer look at the consumer staples company and examine how the smart money feels about the stock.

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We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see more details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

Bill Ackman of Pershing Square Capital Management bought a 7.5% stake in Mondelez International Inc (NASDAQ:MDLZ) earlier in the year and asked the company to cut costs or sell to a larger rival such as Kraft Heinz. While Mondelez plans to cut costs by as much as $3.5 billion by 2018, it hasn’t sold itself yet. Warren Buffett of Berkshire Hathaway, a leading shareholder of Kraft Heinz, dismissed a wholesale takeover of Mondelez by Kraft:

“At Kraft Heinz, we have our work cut out for us for a couple of years. Frankly, most of the food companies sell at prices that it would be very hard for us to make a deal even if we had done all the work needed at Kraft Heinz,” Buffett said

With the Reuters report, it seems that Mondelez is acquiescing to Ackman’s request, although the company is selling itself in a piecemeal fashion rather than in a wholesale manner.

Analysts are bullish on Mondelez. Ten analysts have a ‘Buy’ rating, one has a ‘Sell’ rating, and three have a ‘Hold’ rating on the stock. JPMorgan Chase & Co has an ‘Overweight’ rating with a price target of $50 per share, while Nomura has a ‘Reduce’ rating with a $35 price target. Canaccord Genuity has a ‘Hold’ rating with a $44 price target. Overall, analysts have a consensus price target of $46.69 per share, giving shares an upside of 10.62% from current levels.

We think Mondelez is a good long-term holding. While Mondelez’s forward P/E of 20.66 is in line with Kraft Heinz’s forward P/E of 21.75, Mondelez will grow faster than Kraft because it is more international. Ackman is the best of his generation at unlocking shareholder value. Ackman successfully turned sleepy Botox maker Allergan into a $100 billion market cap stock and his requests can send Mondelez shares higher too. Ackman has done an admirable job so far, with Mondelez shares up by 17.5% year-to-date.

While analysts and Ackman are optimistic, hedge funds outside of Pershing Square are cautious on Mondelez International Inc (NASDAQ:MDLZ). Of the 730 elite funds we track, 49 funds owned $4.81 billion of the company’s shares, representing 7.20% of the float, on June 30, down from 65 funds and $6.11 billion on March 31. Nelson Peltz‘s Trian Partners increased its position by 1% in the second quarter, to 48.03 million shares, while Boykin Curry’s Eagle Capital Management decreased its stake by 7% to 20.19 million shares. Daniel S. Och’s OZ Management trimmed its position by 18% to 8.61 million shares while Lei Zhang’s Hillhouse Capital Management kept its holding in the company the same at 9.3 million shares. Phill Gross and Robert Atchinson’s Adage Capital Management cut its stake by 18% to 5.18 million shares.

Disclosure: None