It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% in 2019. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ consensus stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Shake Shack Inc (NYSE:SHAK).
Is Shake Shack Inc (NYSE:SHAK) ready to rally soon? The best stock pickers are in a pessimistic mood. The number of long hedge fund positions decreased by 1 recently. Our calculations also showed that SHAK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). SHAK was in 26 hedge funds’ portfolios at the end of the third quarter of 2019. There were 27 hedge funds in our database with SHAK holdings at the end of the previous quarter.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Jim Simons of Renaissance Technologies
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let’s take a glance at the fresh hedge fund action encompassing Shake Shack Inc (NYSE:SHAK).
How have hedgies been trading Shake Shack Inc (NYSE:SHAK)?
Heading into the fourth quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the second quarter of 2019. On the other hand, there were a total of 22 hedge funds with a bullish position in SHAK a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, 12 West Capital Management held the most valuable stake in Shake Shack Inc (NYSE:SHAK), which was worth $254.7 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $169.7 million worth of shares. D E Shaw, Citadel Investment Group, and Bridger 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 12 West Capital Management allocated the biggest weight to Shake Shack Inc (NYSE:SHAK), around 16.4% of its 13F portfolio. Bridger Management is also relatively very bullish on the stock, dishing out 2.94 percent of its 13F equity portfolio to SHAK.
Due to the fact that Shake Shack Inc (NYSE:SHAK) has faced bearish sentiment from the smart money, logic holds that there lies a certain “tier” of money managers who were dropping their full holdings heading into Q4. Interestingly, Dmitry Balyasny’s Balyasny Asset Management dumped the biggest stake of all the hedgies followed by Insider Monkey, worth close to $34.5 million in stock, and Josh Tarasoff’s Greenlea Lane Capital was right behind this move, as the fund dropped about $12.1 million worth. These moves are important to note, as total hedge fund interest fell by 1 funds heading into Q4.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Shake Shack Inc (NYSE:SHAK) but similarly valued. These stocks are Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL), Penske Automotive Group, Inc. (NYSE:PAG), Compania de Minas Buenaventura SA (NYSE:BVN), and United Bankshares, Inc. (NASDAQ:UBSI). This group of stocks’ market valuations are closest to SHAK’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CBRL | 21 | 240229 | -1 |
| PAG | 16 | 63851 | -1 |
| BVN | 6 | 14159 | -1 |
| UBSI | 10 | 24052 | -4 |
| Average | 13.25 | 85573 | -1.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $86 million. That figure was $607 million in SHAK’s case. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) is the most popular stock in this table. On the other hand Compania de Minas Buenaventura SA (NYSE:BVN) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Shake Shack Inc (NYSE:SHAK) 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. Unfortunately SHAK wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SHAK were disappointed as the stock returned 31.2% in 2019 and trailed 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 65 percent of these stocks outperformed the market in 2019.
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.
