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2019 Review: Top Hedge Fund Stocks vs. US Foods Holding Corp. (USFD)

Debasis Saha

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like US Foods Holding Corp. (NYSE:USFD).

US Foods Holding Corp. (NYSE:USFD) has seen an increase in activity from the world's largest hedge funds in recent months. Our calculations also showed that USFD 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).

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_339739" align="alignnone" width="600"] Ricky Sandler of Eminence Capital[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. 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 already gained 20 percent. Keeping this in mind we're going to take a gander at the recent hedge fund action surrounding US Foods Holding Corp. (NYSE:USFD).

Hedge fund activity in US Foods Holding Corp. (NYSE:USFD)

At the end of the third quarter, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in USFD over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is USFD A Good Stock To Buy?

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Eminence Capital, managed by Ricky Sandler, holds the biggest position in US Foods Holding Corp. (NYSE:USFD). Eminence Capital has a $135.4 million position in the stock, comprising 1.6% of its 13F portfolio. On Eminence Capital's heels is Scott Ferguson of Sachem Head Capital, with a $119.2 million position; the fund has 9.3% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish contain David E. Shaw's D E Shaw, Steve Cohen's Point72 Asset Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Marathon Partners allocated the biggest weight to US Foods Holding Corp. (NYSE:USFD), around 10.04% of its 13F portfolio. Sachem Head Capital is also relatively very bullish on the stock, designating 9.33 percent of its 13F equity portfolio to USFD.

Consequently, some big names were breaking ground themselves. Moore Global Investments, managed by Louis Bacon, established the most valuable position in US Foods Holding Corp. (NYSE:USFD). Moore Global Investments had $20.6 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also initiated a $9.3 million position during the quarter. The following funds were also among the new USFD investors: Paul Tudor Jones's Tudor Investment Corp, Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, and Matthew Hulsizer's PEAK6 Capital Management.

Let's now take a look at hedge fund activity in other stocks similar to US Foods Holding Corp. (NYSE:USFD). We will take a look at Amdocs Limited (NYSE:DOX), CyrusOne Inc (NASDAQ:CONE), SEI Investments Company (NASDAQ:SEIC), and Mohawk Industries, Inc. (NYSE:MHK). All of these stocks' market caps resemble USFD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOX,23,621074,-2 CONE,21,314844,3 SEIC,23,390443,1 MHK,32,1522732,-1 Average,24.75,712273,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.75 hedge funds with bullish positions and the average amount invested in these stocks was $712 million. That figure was $1270 million in USFD's case. Mohawk Industries, Inc. (NYSE:MHK) is the most popular stock in this table. On the other hand CyrusOne Inc (NASDAQ:CONE) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks US Foods Holding Corp. (NYSE:USFD) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately USFD wasn't nearly as popular as these 20 stocks and hedge funds that were betting on USFD were disappointed as the stock returned 30.6% so far in 2019 (through 12/23) 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 already 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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