Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Flowers Foods, Inc. (NYSE:FLO) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.
Flowers Foods, Inc. (NYSE:FLO) investors should pay attention to an increase in enthusiasm from smart money recently. FLO was in 28 hedge funds' portfolios at the end of the third quarter of 2019. There were 22 hedge funds in our database with FLO holdings at the end of the previous quarter. Our calculations also showed that FLO 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).
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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_375529" align="aligncenter" width="450"] Mario Gabelli of GAMCO Investors[/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. With all of this in mind we're going to go over the fresh hedge fund action surrounding Flowers Foods, Inc. (NYSE:FLO).
Hedge fund activity in Flowers Foods, Inc. (NYSE:FLO)
Heading into the fourth quarter of 2019, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of 27% from one quarter earlier. By comparison, 20 hedge funds held shares or bullish call options in FLO a year ago. With the smart money's capital changing hands, there exists a few noteworthy hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
Among these funds, Diamond Hill Capital held the most valuable stake in Flowers Foods, Inc. (NYSE:FLO), which was worth $70.8 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $56.1 million worth of shares. GAMCO Investors, Millennium Management, and GLG Partners 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 Neo Ivy Capital allocated the biggest weight to Flowers Foods, Inc. (NYSE:FLO), around 0.42% of its 13F portfolio. Diamond Hill Capital is also relatively very bullish on the stock, designating 0.38 percent of its 13F equity portfolio to FLO.
Now, some big names have been driving this bullishness. Ellington, managed by Mike Vranos, created the largest position in Flowers Foods, Inc. (NYSE:FLO). Ellington had $1.5 million invested in the company at the end of the quarter. Joel Greenblatt's Gotham Asset Management also initiated a $0.8 million position during the quarter. The other funds with new positions in the stock are Renee Yao's Neo Ivy Capital, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, and Donald Sussman's Paloma Partners.
Let's also examine hedge fund activity in other stocks similar to Flowers Foods, Inc. (NYSE:FLO). We will take a look at Generac Holdings Inc. (NYSE:GNRC), Teladoc Health, Inc. (NYSE:TDOC), JetBlue Airways Corporation (NASDAQ:JBLU), and Cimarex Energy Co (NYSE:XEC). All of these stocks' market caps are closest to FLO's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GNRC,30,289728,5 TDOC,17,102048,-1 JBLU,23,646872,-4 XEC,31,926221,4 Average,25.25,491217,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $491 million. That figure was $244 million in FLO's case. Cimarex Energy Co (NYSE:XEC) is the most popular stock in this table. On the other hand Teladoc Health, Inc. (NYSE:TDOC) is the least popular one with only 17 bullish hedge fund positions. Flowers Foods, Inc. (NYSE:FLO) 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 FLO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on FLO were disappointed as the stock returned 22.7% 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.