StoneCo Ltd. (STNE): Hedge Fund Interest Keeps Inching Up

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards StoneCo Ltd. (NASDAQ:STNE) and determine whether hedge funds skillfully traded this stock.

Is StoneCo Ltd. (NASDAQ:STNE) a good investment today? Investors who are in the know were in an optimistic mood. The number of bullish hedge fund bets inched up by 1 recently. StoneCo Ltd. (NASDAQ:STNE) was in 35 hedge funds’ portfolios at the end of June. The all time high for this statistics is 34. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that STNE 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). There were 34 hedge funds in our database with STNE positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Peter Rathjens of Arrowstreet 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 junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now let’s review the fresh hedge fund action regarding StoneCo Ltd. (NASDAQ:STNE).

What does smart money think about StoneCo Ltd. (NASDAQ:STNE)?

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in STNE over the last 20 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

More specifically, Berkshire Hathaway was the largest shareholder of StoneCo Ltd. (NASDAQ:STNE), with a stake worth $549.1 million reported as of the end of September. Trailing Berkshire Hathaway was Whale Rock Capital Management, which amassed a stake valued at $148.9 million. Light Street Capital, Foxhaven Asset Management, and Steadfast Capital 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 Cartica Management allocated the biggest weight to StoneCo Ltd. (NASDAQ:STNE), around 14.16% of its 13F portfolio. Prince Street Capital Management is also relatively very bullish on the stock, designating 10.72 percent of its 13F equity portfolio to STNE.

As aggregate interest increased, some big names were leading the bulls’ herd. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the most valuable position in StoneCo Ltd. (NASDAQ:STNE). Arrowstreet Capital had $45.7 million invested in the company at the end of the quarter. Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital also initiated a $29.9 million position during the quarter. The other funds with brand new STNE positions are Lee Hicks and Jan Koerner’s Park Presidio Capital, Mark Moore’s ThornTree Capital Partners, and Kevin Mok’s Hidden Lake Asset Management.

Let’s check out hedge fund activity in other stocks similar to StoneCo Ltd. (NASDAQ:STNE). These stocks are United Rentals, Inc. (NYSE:URI), Booz Allen Hamilton Holding Corporation (NYSE:BAH), Cable One Inc (NYSE:CABO), Regions Financial Corporation (NYSE:RF), Credicorp Ltd. (NYSE:BAP), C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), and Monolithic Power Systems, Inc. (NASDAQ:MPWR). All of these stocks’ market caps resemble STNE’s market cap.

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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 $451 million. That figure was $1343 million in STNE’s case. United Rentals, Inc. (NYSE:URI) is the most popular stock in this table. On the other hand Credicorp Ltd. (NYSE:BAP) is the least popular one with only 20 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 73.5. 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 gained 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on STNE as the stock returned 31.6% since Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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