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Did The Smart Money Play Toast Inc. (TOST) Correctly?

·5 min 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 Toast Inc. (NYSE:TOST) and determine whether hedge funds skillfully traded this stock.

Is Toast Inc. (NYSE:TOST) going to take off soon? The smart money was in a bullish mood. The number of bullish hedge fund bets increased by 38 in recent months. Toast Inc. (NYSE:TOST) was in 38 hedge funds' portfolios at the end of the third quarter of 2021. Our calculations also showed that TOST isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings).

David Blood
David Blood

David Blood of Generation Investment Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we're going to take a look at the key hedge fund action regarding Toast Inc. (NYSE:TOST).

Do Hedge Funds Think TOST Is A Good Stock To Buy Now?

At third quarter's end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 38 from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards TOST over the last 25 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.

Is TOST A Good Stock To Buy?
Is TOST A Good Stock To Buy?

More specifically, Echo Street Capital Management was the largest shareholder of Toast Inc. (NYSE:TOST), with a stake worth $82.3 million reported as of the end of September. Trailing Echo Street Capital Management was Tiger Global Management LLC, which amassed a stake valued at $62.4 million. Alta Park Capital, Generation Investment Management, and Citadel Investment Group 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 Cowbird Capital allocated the biggest weight to Toast Inc. (NYSE:TOST), around 6.6% of its 13F portfolio. Alta Park Capital is also relatively very bullish on the stock, dishing out 4.42 percent of its 13F equity portfolio to TOST.

As industrywide interest jumped, key money managers were breaking ground themselves. Echo Street Capital Management, managed by Greg Poole, established the biggest position in Toast Inc. (NYSE:TOST). Echo Street Capital Management had $82.3 million invested in the company at the end of the quarter. Chase Coleman's Tiger Global Management LLC also initiated a $62.4 million position during the quarter. The other funds with new positions in the stock are Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali's Alta Park Capital, David Blood and Al Gore's Generation Investment Management, and Ken Griffin's Citadel Investment Group.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Toast Inc. (NYSE:TOST) but similarly valued. These stocks are CDW Corporation (NASDAQ:CDW), Avantor, Inc. (NYSE:AVTR), Ryanair Holdings plc (NASDAQ:RYAAY), Franco-Nevada Corporation (NYSE:FNV), AmerisourceBergen Corporation (NYSE:ABC), Cheniere Energy, Inc. (NYSE:LNG), and Horizon Therapeutics Public Limited Company (NASDAQ:HZNP). This group of stocks' market valuations are closest to TOST's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CDW,37,1906004,10 AVTR,53,2439815,9 RYAAY,15,411390,0 FNV,26,951083,3 ABC,44,1214780,1 LNG,49,3103167,0 HZNP,60,4573780,4 Average,40.6,2085717,3.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.6 hedge funds with bullish positions and the average amount invested in these stocks was $2086 million. That figure was $567 million in TOST's case. Horizon Therapeutics Public Limited Company (NASDAQ:HZNP) is the most popular stock in this table. On the other hand Ryanair Holdings plc (NASDAQ:RYAAY) is the least popular one with only 15 bullish hedge fund positions. Toast Inc. (NYSE:TOST) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for TOST is 50.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and surpassed the market again by 3.6 percentage points. Unfortunately, TOST wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); TOST investors were disappointed as the stock returned -54.2% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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