Were Hedge Funds Right About Crowding Into StoneCo Ltd. (STNE)?

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 StoneCo Ltd. (NASDAQ:STNE)? The smart money sentiment can provide an answer to this question.

StoneCo Ltd. (NASDAQ:STNE) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. 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. STNE investors should be aware of an increase in enthusiasm from smart money recently. There were 34 hedge funds in our database with STNE positions at the end of the first quarter. 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).

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 was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Warren Buffett of Berkshire Hathaway

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 telecom 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 peek at the new hedge fund action encompassing StoneCo Ltd. (NASDAQ:STNE).

What have hedge funds been doing with StoneCo Ltd. (NASDAQ:STNE)?

Heading into the third quarter of 2020, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 3% from the previous quarter. By comparison, 27 hedge funds held shares or bullish call options in STNE a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Berkshire Hathaway held the most valuable stake in StoneCo Ltd. (NASDAQ:STNE), which was worth $549.1 million at the end of the third quarter. On the second spot was Whale Rock Capital Management which amassed $148.9 million worth of shares. 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, earmarking 10.72 percent of its 13F equity portfolio to STNE.

As aggregate interest increased, key money managers have jumped into StoneCo Ltd. (NASDAQ:STNE) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the most outsized 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 made a $29.9 million investment in the stock 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). We will take a look at 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). This group of stocks’ market values match STNE’s market value.

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 $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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on STNE as the stock returned 35.6% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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