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Did Hedge Funds Drop The Ball On PepsiCo, Inc. (PEP) ?

Nina Todic

Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 12.1% in 2019 (through May 30th). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of 18.7% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like PepsiCo, Inc. (NASDAQ:PEP).

Is PepsiCo, Inc. (NASDAQ:PEP) going to take off soon? Prominent investors are taking a pessimistic view. The number of bullish hedge fund positions dropped by 2 lately. Our calculations also showed that pep isn't among the 30 most popular stocks among hedge funds.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Donald Yacktman

We're going to take a look at the fresh hedge fund action encompassing PepsiCo, Inc. (NASDAQ:PEP).

What does the smart money think about PepsiCo, Inc. (NASDAQ:PEP)?

Heading into the second quarter of 2019, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PEP over the last 15 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with PEP Positions

Among these funds, Yacktman Asset Management held the most valuable stake in PepsiCo, Inc. (NASDAQ:PEP), which was worth $917.5 million at the end of the first quarter. On the second spot was Renaissance Technologies which amassed $881 million worth of shares. Moreover, Fisher Asset Management, Two Sigma Advisors, and AQR Capital Management were also bullish on PepsiCo, Inc. (NASDAQ:PEP), allocating a large percentage of their portfolios to this stock.

Due to the fact that PepsiCo, Inc. (NASDAQ:PEP) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there was a specific group of hedge funds that elected to cut their full holdings heading into Q3. At the top of the heap, John Lykouretzos's Hoplite Capital Management said goodbye to the biggest stake of all the hedgies tracked by Insider Monkey, worth an estimated $24.1 million in stock, and Michael Kharitonov and Jon David McAuliffe's Voleon Capital was right behind this move, as the fund sold off about $22.1 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 2 funds heading into Q3.

Let's check out hedge fund activity in other stocks similar to PepsiCo, Inc. (NASDAQ:PEP). We will take a look at Toyota Motor Corporation (NYSE:TM), Anheuser-Busch InBev SA/NV (NYSE:BUD), HSBC Holdings plc (NYSE:HSBC), and Netflix, Inc. (NASDAQ:NFLX). This group of stocks' market valuations resemble PEP's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TM,10,161453,2 BUD,22,1493242,1 HSBC,12,1080398,1 NFLX,96,9396182,13 Average,35,3032819,4.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $3033 million. That figure was $4491 million in PEP's case. Netflix, Inc. (NASDAQ:NFLX) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 10 bullish hedge fund positions. PepsiCo, Inc. (NASDAQ:PEP) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on PEP as the stock returned 4.9% during the same period 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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