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We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let's see whether Arcos Dorados Holding Inc (NYSE:ARCO) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Is Arcos Dorados Holding Inc (NYSE:ARCO) a great investment today? The best stock pickers are in a pessimistic mood. The number of bullish hedge fund bets fell by 1 recently. Our calculations also showed that ARCO isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). ARCO was in 13 hedge funds' portfolios at the end of the fourth quarter of 2019. There were 14 hedge funds in our database with ARCO positions at the end of the previous quarter.
In today’s marketplace there are many indicators stock traders use to value their stock investments. Some of the most useful indicators are hedge fund and insider trading activity. Our researchers have shown that, historically, those who follow the best picks of the elite investment managers can outclass their index-focused peers by a superb amount (see the details here).
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Richard Driehaus of Driehaus Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve and other Central Banks are tripping over each other to print more money. As a result, we believe gold stocks will outperform fixed income ETFs in the long-term. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now let's analyze the key hedge fund action surrounding Arcos Dorados Holding Inc (NYSE:ARCO).
How are hedge funds trading Arcos Dorados Holding Inc (NYSE:ARCO)?
At Q4's end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in ARCO over the last 18 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Arcos Dorados Holding Inc (NYSE:ARCO) was held by Moerus Capital Management, which reported holding $42.5 million worth of stock at the end of September. It was followed by Bill & Melinda Gates Foundation Trust with a $24.8 million position. Other investors bullish on the company included International Value Advisers, Millennium Management, and Driehaus Capital. In terms of the portfolio weights assigned to each position Moerus Capital Management allocated the biggest weight to Arcos Dorados Holding Inc (NYSE:ARCO), around 13.76% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, setting aside 0.79 percent of its 13F equity portfolio to ARCO.
Since Arcos Dorados Holding Inc (NYSE:ARCO) has witnessed a decline in interest from the aggregate hedge fund industry, it's easy to see that there lies a certain "tier" of money managers that elected to cut their entire stakes last quarter. It's worth mentioning that Bruce Kovner's Caxton Associates LP dropped the biggest position of the 750 funds monitored by Insider Monkey, comprising about $0.4 million in stock. Minhua Zhang's fund, Weld Capital Management, also cut its stock, about $0.3 million worth. These moves are important to note, as total hedge fund interest was cut by 1 funds last quarter.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Arcos Dorados Holding Inc (NYSE:ARCO) but similarly valued. These stocks are GCP Applied Technologies Inc. (NYSE:GCP), CNX Resources Corporation (NYSE:CNX), Fanhua Inc. (NASDAQ:FANH), and PRA Group, Inc. (NASDAQ:PRAA). This group of stocks' market valuations are closest to ARCO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GCP,20,400771,-2 CNX,18,584938,-2 FANH,7,12505,-1 PRAA,12,49091,1 Average,14.25,261826,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $262 million. That figure was $119 million in ARCO's case. GCP Applied Technologies Inc. (NYSE:GCP) is the most popular stock in this table. On the other hand Fanhua Inc. (NASDAQ:FANH) is the least popular one with only 7 bullish hedge fund positions. Arcos Dorados Holding Inc (NYSE:ARCO) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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. These stocks lost 13.0% in 2020 through April 6th but beat the market by 4.2 percentage points. Unfortunately ARCO wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); ARCO investors were disappointed as the stock returned -59.3% during the same time period and underperformed 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 most of these stocks already outperformed the market in 2020.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.