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Is Freshpet Inc (FRPT) Going to Burn These Hedge Funds?

Abigail Fisher
·6 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 Freshpet Inc (NASDAQ:FRPT) and determine whether hedge funds skillfully traded this stock.

Freshpet Inc (NASDAQ:FRPT) investors should be aware of a decrease in hedge fund sentiment in recent months. Freshpet Inc (NASDAQ:FRPT) was in 21 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 25. There were 24 hedge funds in our database with FRPT positions at the end of the first quarter. Our calculations also showed that FRPT isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

NAVELLIER & ASSOCIATES
NAVELLIER & ASSOCIATES

Louis Navellier of Navellier & Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We are also checking out this lithium company which could benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let's review the fresh hedge fund action surrounding Freshpet Inc (NASDAQ:FRPT).

How have hedgies been trading Freshpet Inc (NASDAQ:FRPT)?

At the end of the second quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -13% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in FRPT a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Rock Springs Capital Management held the most valuable stake in Freshpet Inc (NASDAQ:FRPT), which was worth $39.8 million at the end of the third quarter. On the second spot was Driehaus Capital which amassed $17.8 million worth of shares. Fisher Asset Management, D E Shaw, and Half Sky Capital 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 Half Sky Capital allocated the biggest weight to Freshpet Inc (NASDAQ:FRPT), around 3.83% of its 13F portfolio. Aubrey Capital Management is also relatively very bullish on the stock, designating 2.33 percent of its 13F equity portfolio to FRPT.

Because Freshpet Inc (NASDAQ:FRPT) has faced a decline in interest from the aggregate hedge fund industry, logic holds that there were a few funds who sold off their positions entirely by the end of the second quarter. Intriguingly, Ken Griffin's Citadel Investment Group dropped the biggest investment of all the hedgies followed by Insider Monkey, totaling an estimated $13.8 million in stock, and Principal Global Investors's Columbus Circle Investors was right behind this move, as the fund said goodbye to about $9.1 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 3 funds by the end of the second quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Freshpet Inc (NASDAQ:FRPT) but similarly valued. These stocks are Spire Inc. (NYSE:SR), Glacier Bancorp, Inc. (NASDAQ:GBCI), Iridium Communications Inc. (NASDAQ:IRDM), World Wrestling Entertainment, Inc. (NYSE:WWE), W.R. Grace & Co. (NYSE:GRA), Nextera Energy Partners LP (NYSE:NEP), and Envista Holdings Corporation (NYSE:NVST). All of these stocks' market caps match FRPT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SR,18,40448,5 GBCI,20,61522,8 IRDM,19,223663,-1 WWE,29,390419,-2 GRA,39,1296937,4 NEP,21,125356,0 NVST,21,395641,-1 Average,23.9,361998,1.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.9 hedge funds with bullish positions and the average amount invested in these stocks was $362 million. That figure was $129 million in FRPT's case. W.R. Grace & Co. (NYSE:GRA) is the most popular stock in this table. On the other hand Spire Inc. (NYSE:SR) is the least popular one with only 18 bullish hedge fund positions. Freshpet Inc (NASDAQ:FRPT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FRPT is 34.3. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and still beat the market by 19.3 percentage points. A small number of hedge funds were also right about betting on FRPT as the stock returned 33.5% in the third quarter and outperformed the market by an even larger margin.

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

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