Should I Avoid StoneCo Ltd. (STNE)?

Last year we predicted the arrival of the first US recession since 2009 and we told in advance that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards StoneCo Ltd. (NASDAQ:STNE).

Is StoneCo Ltd. (NASDAQ:STNE) a cheap stock to buy now? The smart money was selling. The number of bullish hedge fund positions decreased by 7 recently. StoneCo Ltd. (NASDAQ:STNE) was in 37 hedge funds’ portfolios at the end of September. The all time high for this statistic is 47. Our calculations also showed that STNE isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we’re going to go over the recent hedge fund action surrounding StoneCo Ltd. (NASDAQ:STNE).

Jeffrey Talpins of Element Capital

Do Hedge Funds Think STNE Is A Good Stock To Buy Now?

At the end of September, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -16% from the previous quarter. On the other hand, there were a total of 38 hedge funds with a bullish position in STNE a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in StoneCo Ltd. (NASDAQ:STNE) was held by Lone Pine Capital, which reported holding $524 million worth of stock at the end of September. It was followed by D1 Capital Partners with a $392.5 million position. Other investors bullish on the company included Berkshire Hathaway, Tybourne Capital Management, and Echo Street Capital Management. In terms of the portfolio weights assigned to each position Element Capital Management allocated the biggest weight to StoneCo Ltd. (NASDAQ:STNE), around 8.13% of its 13F portfolio. Incline Global Management is also relatively very bullish on the stock, designating 5.97 percent of its 13F equity portfolio to STNE.

Because StoneCo Ltd. (NASDAQ:STNE) has witnessed bearish sentiment from the smart money, it’s easy to see that there is a sect of funds that slashed their entire stakes in the third quarter. At the top of the heap, John Armitage’s Egerton Capital Limited sold off the biggest stake of all the hedgies watched by Insider Monkey, comprising an estimated $192.5 million in stock. Josh Donfeld and David Rogers’s fund, Castle Hook Partners, also sold off its stock, about $75.1 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 7 funds in the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as StoneCo Ltd. (NASDAQ:STNE) but similarly valued. We will take a look at Builders FirstSource, Inc. (NYSE:BLDR), American Financial Group, Inc. (NYSE:AFG), Henry Schein, Inc. (NASDAQ:HSIC), Dicks Sporting Goods Inc (NYSE:DKS), GDS Holdings Limited (NASDAQ:GDS), Cemex SAB de CV (NYSE:CX), and Ozon Holdings PLC (NASDAQ:OZON). This group of stocks’ market valuations are similar to STNE’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 28.4 hedge funds with bullish positions and the average amount invested in these stocks was $1030 million. That figure was $2216 million in STNE’s case. Builders FirstSource, Inc. (NASDAQ:BLDR) is the most popular stock in this table. On the other hand Ozon Holdings PLC (NASDAQ:OZON) is the least popular one with only 13 bullish hedge fund positions. StoneCo Ltd. (NASDAQ:STNE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for STNE is 51.6. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.6% in 2021 through November 30th and beat the market again by 5.6 percentage points. Unfortunately STNE wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on STNE were disappointed as the stock returned -55.1% since the end of September (through 11/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.