It has been a fantastic year for equity investors as Donald Trump pressured Federal Reserve to reduce interest rates and finalized the first leg of a trade deal with China. If you were a passive index fund investor, you had seen gains of 31% in your equity portfolio in 2019. However, if you were an active investor putting your money into hedge funds' favorite stocks, you had seen gains of more than 41%. In this article we are going to take a look at how hedge funds feel about a stock like Yum! Brands, Inc. (NYSE:YUM) and compare its performance against hedge funds' favorite stocks.
Yum! Brands, Inc. (NYSE:YUM) was in 35 hedge funds' portfolios at the end of September. YUM investors should be aware of an increase in support from the world's most elite money managers recently. There were 30 hedge funds in our database with YUM positions at the end of the previous quarter. Our calculations also showed that YUM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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' 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_365194" align="alignnone" width="600"] David E. Shaw of D.E. Shaw[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now let's review the fresh hedge fund action regarding Yum! Brands, Inc. (NYSE:YUM).
How have hedgies been trading Yum! Brands, Inc. (NYSE:YUM)?
At Q3's end, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. On the other hand, there were a total of 30 hedge funds with a bullish position in YUM a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
The largest stake in Yum! Brands, Inc. (NYSE:YUM) was held by Two Sigma Advisors, which reported holding $182.3 million worth of stock at the end of September. It was followed by D E Shaw with a $102.3 million position. Other investors bullish on the company included Alkeon Capital Management, Arrowstreet Capital, and Marshall Wace. In terms of the portfolio weights assigned to each position Cognios Capital allocated the biggest weight to Yum! Brands, Inc. (NYSE:YUM), around 0.82% of its 13F portfolio. Winton Capital Management is also relatively very bullish on the stock, dishing out 0.73 percent of its 13F equity portfolio to YUM.
Consequently, specific money managers were breaking ground themselves. Laurion Capital Management, managed by Benjamin A. Smith, initiated the most valuable position in Yum! Brands, Inc. (NYSE:YUM). Laurion Capital Management had $14.9 million invested in the company at the end of the quarter. Gabriel Plotkin's Melvin Capital Management also made a $11.3 million investment in the stock during the quarter. The following funds were also among the new YUM investors: Parvinder Thiara's Athanor Capital, Matthew Iorio's White Elm Capital, and Jeffrey Talpins's Element Capital Management.
Let's also examine hedge fund activity in other stocks similar to Yum! Brands, Inc. (NYSE:YUM). These stocks are Energy Transfer L.P. (NYSE:ET), The Kraft Heinz Company (NASDAQ:KHC), NetEase, Inc (NASDAQ:NTES), and Xcel Energy Inc (NYSE:XEL). This group of stocks' market values are similar to YUM's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ET,30,623109,1 KHC,36,9572927,2 NTES,30,3513002,-4 XEL,17,573407,-1 Average,28.25,3570611,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $3571 million. That figure was $842 million in YUM's case. The Kraft Heinz Company (NASDAQ:KHC) is the most popular stock in this table. On the other hand Xcel Energy Inc (NYSE:XEL) is the least popular one with only 17 bullish hedge fund positions. Yum! Brands, Inc. (NYSE:YUM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately YUM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on YUM were disappointed as the stock returned 10.4% in 2019 (through December 23rd) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.