Was The Smart Money Right About The Kraft Heinz Company (KHC)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in The Kraft Heinz Company (NASDAQ:KHC)? The smart money sentiment can provide an answer to this question.

Is The Kraft Heinz Company (NASDAQ:KHC) a buy, sell, or hold? Hedge funds were cutting their exposure. The number of bullish hedge fund bets shrunk by 4 recently. The Kraft Heinz Company (NASDAQ:KHC) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 60. Our calculations also showed that KHC 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 39 hedge funds in our database with KHC holdings at the end of March.

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

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 S&P 500 ETFs by more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest insurance companies to identify fast growing companies in various industries. 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. With all of this in mind we’re going to take a look at the key hedge fund action encompassing The Kraft Heinz Company (NASDAQ:KHC).

Hedge fund activity in The Kraft Heinz Company (NASDAQ:KHC)

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in KHC over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Berkshire Hathaway was the largest shareholder of The Kraft Heinz Company (NASDAQ:KHC), with a stake worth $10384.5 million reported as of the end of June. Trailing Berkshire Hathaway was Millennium Management, which amassed a stake valued at $60.1 million. Citadel Investment Group, Candlestick Capital Management, and Balyasny Asset 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 Berkshire Hathaway allocated the biggest weight to The Kraft Heinz Company (NASDAQ:KHC), around 5.13% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, dishing out 3.15 percent of its 13F equity portfolio to KHC.

Because The Kraft Heinz Company (NASDAQ:KHC) has faced falling interest from the aggregate hedge fund industry, it’s safe to say that there exists a select few hedgies that slashed their entire stakes heading into Q3. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the largest stake of the 750 funds followed by Insider Monkey, valued at about $55 million in stock, and Mark Coe’s Intrinsic Edge Capital was right behind this move, as the fund dropped about $20.8 million worth. These moves are interesting, as total hedge fund interest dropped by 4 funds heading into Q3.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as The Kraft Heinz Company (NASDAQ:KHC) but similarly valued. These stocks are Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG), DexCom, Inc. (NASDAQ:DXCM), Digital Realty Trust, Inc. (NYSE:DLR), Electronic Arts Inc. (NASDAQ:EA), BCE Inc. (NYSE:BCE), General Mills, Inc. (NYSE:GIS), and Walgreens Boots Alliance Inc (NASDAQ:WBA). This group of stocks’ market values resemble KHC’s market value.

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As you can see these stocks had an average of 35.7 hedge funds with bullish positions and the average amount invested in these stocks was $808 million. That figure was $10727 million in KHC’s case. Electronic Arts Inc. (NASDAQ:EA) is the most popular stock in this table. On the other hand Sumitomo Mitsui Financial Grp, Inc. (NYSE:SMFG) is the least popular one with only 10 bullish hedge fund positions. The Kraft Heinz Company (NASDAQ:KHC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for KHC is 40.4. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately KHC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); KHC investors were disappointed as the stock returned -3% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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