Were Hedge Funds Right About Souring On McDonald’s Corporation (MCD)?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding McDonald’s Corporation (NYSE:MCD).

Is McDonald’s Corporation (NYSE:MCD) the right investment to pursue these days? Investors who are in the know were in a pessimistic mood. The number of bullish hedge fund positions decreased by 9 recently. McDonald’s Corporation (NYSE:MCD) was in 57 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 84. Our calculations also showed that MCD 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 66 hedge funds in our database with MCD 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.

Gavin Saitowitz of Prelude Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. 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. Now let’s take a look at the fresh hedge fund action regarding McDonald’s Corporation (NYSE:MCD).

What does smart money think about McDonald’s Corporation (NYSE:MCD)?

Heading into the third quarter of 2020, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards MCD over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in McDonald’s Corporation (NYSE:MCD) was held by Citadel Investment Group, which reported holding $205.7 million worth of stock at the end of September. It was followed by D E Shaw with a $205.5 million position. Other investors bullish on the company included AQR Capital Management, Adage Capital Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Leonard Green & Partners allocated the biggest weight to McDonald’s Corporation (NYSE:MCD), around 6.88% of its 13F portfolio. Beech Hill Partners is also relatively very bullish on the stock, dishing out 2.03 percent of its 13F equity portfolio to MCD.

Seeing as McDonald’s Corporation (NYSE:MCD) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there lies a certain “tier” of fund managers that decided to sell off their full holdings last quarter. It’s worth mentioning that Renaissance Technologies said goodbye to the largest position of the “upper crust” of funds monitored by Insider Monkey, totaling close to $74.1 million in stock. Gregg Moskowitz’s fund, Interval Partners, also sold off its stock, about $25.6 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 9 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as McDonald’s Corporation (NYSE:MCD) but similarly valued. We will take a look at Accenture Plc (NYSE:ACN), Costco Wholesale Corporation (NASDAQ:COST), Bristol Myers Squibb Company (NYSE:BMY), T-Mobile US, Inc. (NASDAQ:TMUS), Sanofi (NASDAQ:SNY), Broadcom Inc (NASDAQ:AVGO), and BHP Group (NYSE:BHP). This group of stocks’ market caps are closest to MCD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 64.7 hedge funds with bullish positions and the average amount invested in these stocks was $3419 million. That figure was $1357 million in MCD’s case. Bristol Myers Squibb Company (NYSE:BMY) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 16 bullish hedge fund positions. McDonald’s Corporation (NYSE:MCD) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for MCD is 33.4. 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. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. A small number of hedge funds were also right about betting on MCD as the stock returned 25.1% since the end of the second quarter (through 10/16) and outperformed the market by an even larger margin.

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