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Did Hedge Funds Drop The Ball On Jack in the Box Inc. (JACK) ?

Nina Todic

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in Jack in the Box Inc. (NASDAQ:JACK)? The smart money sentiment can provide an answer to this question.

Is Jack in the Box Inc. (NASDAQ:JACK) a buy here? Hedge funds are selling. The number of long hedge fund bets decreased by 3 recently. Our calculations also showed that JACK isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.

Barry Rosenstein JANA PARTNERS

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to analyze the key hedge fund action encompassing Jack in the Box Inc. (NASDAQ:JACK).

How have hedgies been trading Jack in the Box Inc. (NASDAQ:JACK)?

At Q2's end, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards JACK over the last 16 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

No of Hedge Funds with JACK Positions

Of the funds tracked by Insider Monkey, Millennium Management, managed by Israel Englander, holds the biggest position in Jack in the Box Inc. (NASDAQ:JACK). Millennium Management has a $104.3 million position in the stock, comprising 0.2% of its 13F portfolio. Coming in second is JANA Partners, led by Barry Rosenstein, holding a $76.5 million position; 6.4% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors with similar optimism include Paul Marshall and Ian Wace's Marshall Wace LLP, Ken Griffin's Citadel Investment Group and Robert Pohly's Samlyn Capital.

Seeing as Jack in the Box Inc. (NASDAQ:JACK) has experienced a decline in interest from the smart money, logic holds that there exists a select few hedge funds who were dropping their full holdings in the second quarter. Interestingly, Clifton S. Robbins's Blue Harbour Group dumped the largest position of all the hedgies followed by Insider Monkey, valued at about $130.1 million in stock. Kenneth Squire's fund, 13D Management, also said goodbye to its stock, about $13.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 3 funds in the second 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. We will take a look at Otter Tail Corporation (NASDAQ:OTTR), Akcea Therapeutics, Inc. (NASDAQ:AKCA), Stepan Company (NYSE:SCL), and The Simply Good Foods Company (NASDAQ:SMPL). This group of stocks' market caps are similar to JACK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OTTR,12,77316,2 AKCA,8,23583,1 SCL,11,55727,-5 SMPL,23,243876,1 Average,13.5,100126,-0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $100 million. That figure was $546 million in JACK's case. The Simply Good Foods Company (NASDAQ:SMPL) is the most popular stock in this table. On the other hand Akcea Therapeutics, Inc. (NASDAQ:AKCA) is the least popular one with only 8 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on JACK as the stock returned 12.5% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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