How do you pick the next stock to invest in? One way would be to spend days 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 generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Shake Shack Inc (NYSE:SHAK) and determine whether hedge funds had an edge regarding this stock.
Shake Shack Inc (NYSE:SHAK) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 22 hedge funds’ portfolios at the end of the second quarter of 2020. Our calculations also showed that SHAK isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare SHAK to other stocks including New Fortress Energy LLC (NASDAQ:NFE), Kennedy-Wilson Holdings Inc (NYSE:KW), and Stepan Company (NYSE:SCL) to get a better sense of its popularity.
Video: Watch our video about the top 5 most popular hedge fund stocks.
In the financial world there are a lot of gauges shareholders use to analyze stocks. A couple of the most underrated gauges are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the top picks of the elite investment managers can outpace the S&P 500 by a healthy amount (see the details here).
Ricky Sandler of Eminence Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a glance at the fresh hedge fund action surrounding Shake Shack Inc (NYSE:SHAK).
What have hedge funds been doing with Shake Shack Inc (NYSE:SHAK)?
At the end of the second quarter, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the first quarter of 2020. On the other hand, there were a total of 27 hedge funds with a bullish position in SHAK a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, 12 West Capital Management was the largest shareholder of Shake Shack Inc (NYSE:SHAK), with a stake worth $148.5 million reported as of the end of September. Trailing 12 West Capital Management was Select Equity Group, which amassed a stake valued at $89.3 million. Eminence Capital, Valiant Capital, and Zevenbergen Capital Investments 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 Clearfield Capital allocated the biggest weight to Shake Shack Inc (NYSE:SHAK), around 9.78% of its 13F portfolio. 12 West Capital Management is also relatively very bullish on the stock, dishing out 7.67 percent of its 13F equity portfolio to SHAK.
Since Shake Shack Inc (NYSE:SHAK) has witnessed bearish sentiment from hedge fund managers, it’s safe to say that there were a few hedge funds who were dropping their entire stakes heading into Q3. Intriguingly, Anand Desai’s Darsana Capital Partners sold off the biggest stake of the 750 funds followed by Insider Monkey, comprising about $18.9 million in stock. Roberto Mignone’s fund, Bridger Management, also dropped its stock, about $17 million worth. These transactions are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Shake Shack Inc (NYSE:SHAK) but similarly valued. We will take a look at New Fortress Energy LLC (NASDAQ:NFE), Kennedy-Wilson Holdings Inc (NYSE:KW), Stepan Company (NYSE:SCL), Afya Limited (NASDAQ:AFYA), Kornit Digital Ltd. (NASDAQ:KRNT), Dorman Products Inc. (NASDAQ:DORM), and ExlService Holdings, Inc. (NASDAQ:EXLS). 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 |
|---|---|---|---|
| NFE | 5 | 24818 | 3 |
| KW | 14 | 350773 | -8 |
| SCL | 15 | 51618 | 5 |
| AFYA | 6 | 48743 | -2 |
| KRNT | 9 | 56653 | 0 |
| DORM | 19 | 73124 | 5 |
| EXLS | 12 | 50570 | -3 |
| Average | 11.4 | 93757 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.4 hedge funds with bullish positions and the average amount invested in these stocks was $94 million. That figure was $459 million in SHAK’s case. Dorman Products Inc. (NASDAQ:DORM) is the most popular stock in this table. On the other hand New Fortress Energy LLC (NASDAQ:NFE) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Shake Shack Inc (NYSE:SHAK) is more popular among hedge funds. Our overall hedge fund sentiment score for SHAK is 77.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 24.8% in 2020 through the end of September but still managed to beat the market by 19.3 percentage points. Hedge funds were also right about betting on SHAK as the stock returned 21.7% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
