Hedge Funds Were Piling Into These 5 Stocks In Q3

How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generate strong returns after adjusting for known risk factors.

With that in mind, let’s take a look at five stocks hedge funds piled into in the third quarter. They are Mondelez International Inc (NASDAQ:MDLZ), Citizens Financial Group Inc (NYSE:CFG), J M Smucker Co (NYSE:SJM), Priceline Group Inc (NASDAQ:PCLN), and Alphabet Inc (NASDAQ:GOOGL).

#5 J M Smucker Co (NYSE:SJM)

Number of Hedge Fund Holders (as of September 30): 47
Total Value of Hedge Fund Holdings (as of September 30): $1.58 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 11.50%

47 hedge funds were long J M Smucker Co (NYSE:SJM) at the end of the third quarter, up from 30 hedge funds long the stock three months earlier. The branded foods manufacturer reported excellent second quarter of fiscal year 2016 results, with EPS of $1.62, beating estimates by $0.11 per share. Adjusted gross margin increased 2by two percentage points to 37.7%. Because of the strong results and the company’s reasonable forward P/E of 19, J M Smucker Co shares are up by over 23% year-to-date. Daniel S. Och’s OZ Management established a new position of 2.76 million shares in J M Smucker during the quarter.

Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).

#4 Citizens Financial Group Inc (NYSE:CFG)

Number of Hedge Fund Holders (as of September 30): 56
Total Value of Hedge Fund Holdings (as of September 30): $1.55 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 12.30%

Given that Citizens Financial Group Inc (NYSE:CFG)’s EPS will increase as interest rates normalize, it’s not surprising that the total number of hedge funds long the stock increased by 18 to 56 in the third quarter. Among the hedge funds that established new positions were Ken Griffin‘s Citadel Investment Group, which purchased 10.65 million shares, and Brian Jackelow‘s SAB Capital Management, which added a new stake of 4.4 million shares of Citizens Financial Group into its portfolio. Although shares are up by 6.8% year-to-date, Citizens Financial Group has more room to rally given the bank’s modest 0.72 price-to-book ratio.

#3 Mondelez International Inc (NASDAQ:MDLZ)

Number of Hedge Fund Holders (as of September 30): 69
Total Value of Hedge Fund Holdings (as of September 30): $6.88 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 10.20%

Consumer staples companies aren’t sexy but they tend to outperform the market over long stretches of time due to their durable cash flows and inelastic demand. If a consumer staples company also has considerable international growth exposure and cost-efficiency opportunities, that’s even better. To many hedge funds, Mondelez International Inc (NASDAQ:MDLZ) fits the desired long criteria. The number of elite funds long the stock increased to 69 by the close of the third quarter from 49 at the start of it, while the total value of their holdings rose to $6.88 billion from $4.81 billion. Among the new shareholders of Mondelez is Bill Ackman‘s Pershing Square, which owns a new stake of over 43 million shares of the company as of September 30.

#2 Priceline Group Inc (NASDAQ:PCLN)

Number of Hedge Fund Holders (as of September 30): 86
Total Value of Hedge Fund Holdings (as of September 30): $7.08 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 11.30%

Given the strong U.S economy, hedge funds are increasingly bullish on Priceline Group Inc (NASDAQ:PCLN), with 86 hedge funds long the stock at the end of September, up from 71 elite shareholders owning the stock at the end of June. Because consumers are more confident and businesses are spending again, the provider of online travel and travel-related reservation and search services has beaten analyst earnings and revenue estimates every quarter this year. Among the new believers in the stock during the third quarter were Jim Tarantino and Chris Galvin’s Westerly Capital Management, and William B. Gray’s Orbis Investment Management. Priceline shares are up by 8.77% year-to-date.

#1 Alphabet Inc (NASDAQ:GOOGL)

Number of Hedge Fund Holders (as of September 30): 129
Total Value of Hedge Fund Holdings (as of September 30): $11.3 billion
Hedge Fund Holdings as Percent of Float (as of September 30): 2.60%

Alphabet Inc (NASDAQ:GOOGL) is becoming more and more like a hedge fund hotel, with the number of elite funds long the holding company of the internet search provider increasing to 129 at the end of September from 115 at the end of June. Among the new shareholders of Alphabet are Doug Silverman and Alexander Klabin’s Senator Investment Group, and Mark Kingdon’s Kingdon Capital. William Von Mueffling’s Cantillon Capital Management also increased its position by 127% to 888,378 shares. Although Alphabet Inc continues to spend substantial amounts of cash on money-losing moon shots such as automated cars and wearable technology, investors are beginning to warm up to those moon-shots’ potential. Alphabet Inc shares are up by 45% year-to-date and are still trending higher.

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