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Did Hedge Funds Make The Right Call On Grocery Outlet Holding Corp. (GO)?

Asma UL Husna
·6 mins read

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Grocery Outlet Holding Corp. (NASDAQ:GO) and determine whether hedge funds skillfully traded this stock.

Grocery Outlet Holding Corp. (NASDAQ:GO) investors should pay attention to an increase in hedge fund interest of late. GO was in 17 hedge funds' portfolios at the end of the first quarter of 2020. There were 14 hedge funds in our database with GO positions at the end of the previous quarter. Our calculations also showed that GO isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

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 S&P 500 ETFs by more than 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. 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.

Sander Gerber Hudson Bay Capital Management
Sander Gerber Hudson Bay Capital Management

Sander Gerber of Hudson Bay Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let's check out the recent hedge fund action encompassing Grocery Outlet Holding Corp. (NASDAQ:GO).

How are hedge funds trading Grocery Outlet Holding Corp. (NASDAQ:GO)?

Heading into the second quarter of 2020, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from the previous quarter. On the other hand, there were a total of 0 hedge funds with a bullish position in GO a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

More specifically, Islet Management was the largest shareholder of Grocery Outlet Holding Corp. (NASDAQ:GO), with a stake worth $19.9 million reported as of the end of September. Trailing Islet Management was Park Presidio Capital, which amassed a stake valued at $17.2 million. Marshall Wace LLP, Highside Global Management, and Renaissance Technologies 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 Highside Global Management allocated the biggest weight to Grocery Outlet Holding Corp. (NASDAQ:GO), around 7.57% of its 13F portfolio. Islet Management is also relatively very bullish on the stock, designating 2.91 percent of its 13F equity portfolio to GO.

As industrywide interest jumped, specific money managers were breaking ground themselves. Highside Global Management, managed by Zach Petrone, initiated the most outsized position in Grocery Outlet Holding Corp. (NASDAQ:GO). Highside Global Management had $12.5 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $11 million position during the quarter. The other funds with brand new GO positions are Gregg Moskowitz's Interval Partners, Sander Gerber's Hudson Bay Capital Management, and Brandon Haley's Holocene Advisors.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Grocery Outlet Holding Corp. (NASDAQ:GO) but similarly valued. These stocks are SiteOne Landscape Supply, Inc. (NYSE:SITE), Intercorp Financial Services Inc. (NYSE:IFS), Change Healthcare Inc. (NASDAQ:CHNG), and Nutanix, Inc. (NASDAQ:NTNX). This group of stocks' market caps resemble GO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SITE,19,86260,4 IFS,2,34394,0 CHNG,47,1053748,22 NTNX,29,440426,-3 Average,24.25,403707,5.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $404 million. That figure was $103 million in GO's case. Change Healthcare Inc. (NASDAQ:CHNG) is the most popular stock in this table. On the other hand Intercorp Financial Services Inc. (NYSE:IFS) is the least popular one with only 2 bullish hedge fund positions. Grocery Outlet Holding Corp. (NASDAQ:GO) 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 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately GO wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); GO investors were disappointed as the stock returned 25.5% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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