Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost around 20%. Facebook, which was the second most popular stock, lost 14% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Sprouts Farmers Market Inc (NASDAQ:SFM) going to take off soon? Investors who are in the know are in a bullish mood. The number of long hedge fund positions moved up by 3 in recent months. Our calculations also showed that SFM isn’t among the 30 most popular stocks among hedge funds.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
We’re going to analyze the key hedge fund action regarding Sprouts Farmers Market Inc (NASDAQ:SFM).
How have hedgies been trading Sprouts Farmers Market Inc (NASDAQ:SFM)?
At Q3’s end, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 19% from the second quarter of 2018. By comparison, 24 hedge funds held shares or bullish call options in SFM heading into this year. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Jim Simons’s Renaissance Technologies has the number one position in Sprouts Farmers Market Inc (NASDAQ:SFM), worth close to $132.7 million, corresponding to 0.1% of its total 13F portfolio. The second most bullish fund manager is Citadel Investment Group, managed by Ken Griffin, which holds a $39.9 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions comprise Ian Simm’s Impax Asset Management, D. E. Shaw’s D E Shaw and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.
As industrywide interest jumped, some big names were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, assembled the most outsized position in Sprouts Farmers Market Inc (NASDAQ:SFM). Balyasny Asset Management had $18.2 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $14.7 million position during the quarter. The other funds with new positions in the stock are Sander Gerber’s Hudson Bay Capital Management, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, and Frederick DiSanto’s Ancora Advisors.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Sprouts Farmers Market Inc (NASDAQ:SFM) but similarly valued. We will take a look at American National Insurance Company (NASDAQ:ANAT), PS Business Parks Inc (NYSE:PSB), Qualys Inc (NASDAQ:QLYS), and Laureate Education, Inc. (NASDAQ:LAUR). This group of stocks’ market values are similar to SFM’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ANAT | 13 | 40807 | 1 |
| PSB | 6 | 60694 | -2 |
| QLYS | 18 | 220821 | 1 |
| LAUR | 20 | 232602 | 6 |
| Average | 14.25 | 138731 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $139 million. That figure was $299 million in SFM’s case. Laureate Education, Inc. (NASDAQ:LAUR) is the most popular stock in this table. On the other hand PS Business Parks Inc (NYSE:PSB) is the least popular one with only 6 bullish hedge fund positions. Sprouts Farmers Market Inc (NASDAQ:SFM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard LAUR might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
