Were Hedge Funds Right About Warming Up To Aramark (ARMK)?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to Aramark (NYSE:ARMK) changed recently.

Aramark (NYSE:ARMK) investors should pay attention to an increase in hedge fund interest of late. Aramark (NYSE:ARMK) was in 34 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 53. Our calculations also showed that ARMK 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 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.

Anna Nikolayevsky of Axel Capital

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 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 we’re going to take a glance at the latest hedge fund action encompassing Aramark (NYSE:ARMK).

Hedge fund activity in Aramark (NYSE:ARMK)

At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from one quarter earlier. By comparison, 36 hedge funds held shares or bullish call options in ARMK a year ago. With hedge funds’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

Among these funds, Kensico Capital held the most valuable stake in Aramark (NYSE:ARMK), which was worth $142.6 million at the end of the third quarter. On the second spot was Permian Investment Partners which amassed $81.8 million worth of shares. King Street Capital, Mantle Ridge LP, and Brahman Capital 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 Mantle Ridge LP allocated the biggest weight to Aramark (NYSE:ARMK), around 100% of its 13F portfolio. Permian Investment Partners is also relatively very bullish on the stock, dishing out 14.69 percent of its 13F equity portfolio to ARMK.

As aggregate interest increased, specific money managers were breaking ground themselves. King Street Capital, managed by Brian J. Higgins, established the most outsized position in Aramark (NYSE:ARMK). King Street Capital had $63.2 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $33.5 million investment in the stock during the quarter. The following funds were also among the new ARMK investors: Isaac Corre’s Governors Lane, Andrew Kurita’s Kettle Hill Capital Management, and Anna Nikolayevsky’s Axel Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Aramark (NYSE:ARMK). These stocks are American Financial Group, Inc. (NYSE:AFG), Polaris Inc. (NYSE:PII), Inphi Corporation (NASDAQ:IPHI), Autoliv Inc. (NYSE:ALV), HD Supply Holdings Inc (NASDAQ:HDS), Apartment Investment and Management Co. (NYSE:AIV), and AppFolio Inc (NASDAQ:APPF). This group of stocks’ market valuations match ARMK’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.3 hedge funds with bullish positions and the average amount invested in these stocks was $533 million. That figure was $597 million in ARMK’s case. Inphi Corporation (NASDAQ:IPHI) is the most popular stock in this table. On the other hand AppFolio Inc (NASDAQ:APPF) is the least popular one with only 21 bullish hedge fund positions. Aramark (NYSE:ARMK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ARMK is 55.2. 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 ARMK as the stock returned 23.5% 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.