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Did Hedge Funds Drop The Ball On Shake Shack Inc (SHAK)?

Reymerlyn Martin

"October lived up to its scary reputation—the S&P 500 falling in the month by the largest amount in the last 40 years, the only worse Octobers being '08 and the Crash of '87. For perspective, there have been only 5 occasions in those 40 years when the S&P 500 declined by greater than 20% from peak to trough. Other than the '87 Crash, all were during recessions. There were 17 other instances, over the same time frame, when the market fell by over 10% but less than 20%. Furthermore, this is the 18th correction of 5% or more since the current bull market started in March '09. Corrections are the norm. They can be healthy as they often undo market complacency—overbought levels—potentially allowing the market to base and move even higher." This is how Trapeze Asset Management summarized the recent market moves in its investor letter. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards one of the stocks hedge funds invest in.

Is Shake Shack Inc (NYSE:SHAK) a cheap investment today? Money managers are getting less bullish. The number of long hedge fund positions were cut by 3 lately. Our calculations also showed that SHAK isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? 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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

BRIDGER MANAGEMENT

Let's take a glance at the latest hedge fund action regarding Shake Shack Inc (NYSE:SHAK).

What does the smart money think about Shake Shack Inc (NYSE:SHAK)?

Heading into the first quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the previous quarter. By comparison, 14 hedge funds held shares or bullish call options in SHAK a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

SHAK_apr2019

The largest stake in Shake Shack Inc (NYSE:SHAK) was held by 12 West Capital Management, which reported holding $118 million worth of stock at the end of December. It was followed by Renaissance Technologies with a $54.4 million position. Other investors bullish on the company included Bridger Management, Balyasny Asset Management, and Greenlea Lane Capital.

Because Shake Shack Inc (NYSE:SHAK) has faced bearish sentiment from the aggregate hedge fund industry, it's safe to say that there were a few funds that slashed their positions entirely last quarter. It's worth mentioning that Robert Joseph Caruso's Select Equity Group cut the largest position of the 700 funds monitored by Insider Monkey, worth close to $25.2 million in stock. James Crichton's fund, Hitchwood Capital Management, also said goodbye to its stock, about $12.6 million worth. These moves are interesting, as total hedge fund interest fell by 3 funds last quarter.

Let's go over hedge fund activity in other stocks similar to Shake Shack Inc (NYSE:SHAK). These stocks are Guess', Inc. (NYSE:GES), iRhythm Technologies, Inc. (NASDAQ:IRTC), Eagle Bancorp, Inc. (NASDAQ:EGBN), and Tellurian Inc. (NASDAQ:TELL). All of these stocks' market caps are similar to SHAK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GES,19,106696,2 IRTC,23,285377,0 EGBN,12,22162,-7 TELL,15,94826,1 Average,17.25,127265,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $127 million. That figure was $247 million in SHAK's case. iRhythm Technologies, Inc. (NASDAQ:IRTC) is the most popular stock in this table. On the other hand Eagle Bancorp, Inc. (NASDAQ:EGBN) is the least popular one with only 12 bullish hedge fund positions. Shake Shack Inc (NYSE:SHAK) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on SHAK as the stock returned 31.2% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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