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Did Hedge Funds Make The Right Call On Hormel Foods Corporation (HRL) ?

Asma UL Husna
·6 min read

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Hormel Foods Corporation (NYSE:HRL) and determine whether hedge funds had an edge regarding this stock.

Hormel Foods Corporation (NYSE:HRL) has experienced an increase in enthusiasm from smart money recently. Our calculations also showed that HRL 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.

[caption id="attachment_26562" align="aligncenter" width="359"] Ray Dalio of Bridgewater Associates[/caption]

BRIDGEWATER ASSOCIATES
BRIDGEWATER ASSOCIATES

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a "weekend trading strategy", so we look into his strategy's picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller's investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to analyze the fresh hedge fund action surrounding Hormel Foods Corporation (NYSE:HRL).

How are hedge funds trading Hormel Foods Corporation (NYSE:HRL)?

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HRL over the last 18 quarters. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the number one position in Hormel Foods Corporation (NYSE:HRL). AQR Capital Management has a $137 million position in the stock, comprising 0.2% of its 13F portfolio. On AQR Capital Management's heels is Renaissance Technologies, with a $52.8 million position; 0.1% of its 13F portfolio is allocated to the stock. Remaining peers that are bullish contain Ken Griffin's Citadel Investment Group, Phill Gross and Robert Atchinson's Adage Capital Management and Dmitry Balyasny's Balyasny Asset Management. In terms of the portfolio weights assigned to each position Cognios Capital allocated the biggest weight to Hormel Foods Corporation (NYSE:HRL), around 1.03% of its 13F portfolio. Ellington is also relatively very bullish on the stock, designating 0.49 percent of its 13F equity portfolio to HRL.

As one would reasonably expect, some big names were leading the bulls' herd. Balyasny Asset Management, managed by Dmitry Balyasny, created the most valuable position in Hormel Foods Corporation (NYSE:HRL). Balyasny Asset Management had $10.4 million invested in the company at the end of the quarter. Anand Parekh's Alyeska Investment Group also initiated a $4.3 million position during the quarter. The other funds with new positions in the stock are Mike Vranos's Ellington, Ray Dalio's Bridgewater Associates, and Greg Eisner's Engineers Gate Manager.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Hormel Foods Corporation (NYSE:HRL) but similarly valued. We will take a look at HP Inc. (NYSE:HPQ), Alcon Inc. (NYSE:ALC), AFLAC Incorporated (NYSE:AFL), and DexCom, Inc. (NASDAQ:DXCM). This group of stocks' market caps are similar to HRL's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HPQ,43,2180945,-6 ALC,25,605394,1 AFL,32,387153,0 DXCM,58,1211152,18 Average,39.5,1096161,3.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.5 hedge funds with bullish positions and the average amount invested in these stocks was $1096 million. That figure was $276 million in HRL's case. DexCom, Inc. (NASDAQ:DXCM) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 25 bullish hedge fund positions. Hormel Foods Corporation (NYSE:HRL) 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately HRL wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HRL investors were disappointed as the stock returned 4% during the second quarter 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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