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2019 Review: Most Favored Hedge Fund Stocks vs. Jack in the Box Inc. (JACK)

Reymerlyn Martin

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 45.7% last year and beat the S&P 500 ETFs by 14.5 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is Jack in the Box Inc. (NASDAQ:JACK) a bargain? Prominent investors are reducing their bets on the stock. The number of bullish hedge fund bets fell by 4 lately. Our calculations also showed that JACK isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_30594" align="aligncenter" width="600"] Barry Rosenstein of JANA Partners[/caption]

Barry Rosenstein JANA PARTNERS

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind we're going to take a look at the key hedge fund action regarding Jack in the Box Inc. (NASDAQ:JACK).

How are hedge funds trading Jack in the Box Inc. (NASDAQ:JACK)?

Heading into the fourth quarter of 2019, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from one quarter earlier. By comparison, 26 hedge funds held shares or bullish call options in JACK a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Millennium Management, managed by Israel Englander, holds the number one position in Jack in the Box Inc. (NASDAQ:JACK). Millennium Management has a $113.2 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is JANA Partners, managed by Barry Rosenstein, which holds a $71.9 million position; 5.8% of its 13F portfolio is allocated to the company. Some other hedge funds and institutional investors with similar optimism include Ken Griffin's Citadel Investment Group, Dmitry Balyasny's Balyasny Asset Management and Paul Marshall and Ian Wace's Marshall Wace. In terms of the portfolio weights assigned to each position JANA Partners allocated the biggest weight to Jack in the Box Inc. (NASDAQ:JACK), around 5.8% of its 13F portfolio. Shellback Capital is also relatively very bullish on the stock, designating 2.48 percent of its 13F equity portfolio to JACK.

Judging by the fact that Jack in the Box Inc. (NASDAQ:JACK) has experienced a decline in interest from the smart money, we can see that there is a sect of hedgies that slashed their positions entirely in the third quarter. At the top of the heap, Robert Pohly's Samlyn Capital cut the largest stake of the "upper crust" of funds tracked by Insider Monkey, comprising close to $40.8 million in stock, and Lee Ainslie's Maverick Capital was right behind this move, as the fund cut about $16.6 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 4 funds in the third quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Jack in the Box Inc. (NASDAQ:JACK) but similarly valued. These stocks are Grupo Aeroportuario del Centro Nort (NASDAQ:OMAB), MakeMyTrip Limited (NASDAQ:MMYT), WSFS Financial Corporation (NASDAQ:WSFS), and LivePerson, Inc. (NASDAQ:LPSN). This group of stocks' market valuations resemble JACK's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OMAB,7,48367,0 MMYT,8,62829,-3 WSFS,10,168789,-5 LPSN,16,190487,-1 Average,10.25,117618,-2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $479 million in JACK's case. LivePerson, Inc. (NASDAQ:LPSN) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Centro Nort (NASDAQ:OMAB) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Jack in the Box Inc. (NASDAQ:JACK) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately JACK wasn't nearly as popular as these 20 stocks and hedge funds that were betting on JACK were disappointed as the stock returned 2.5% in 2019 and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 65 percent of these stocks outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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