While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Hostess Brands, Inc. (NASDAQ:TWNK) and see how the stock performed in comparison to hedge funds' consensus picks.
Hostess Brands, Inc. (NASDAQ:TWNK) investors should be aware of an increase in activity from the world's largest hedge funds lately. Our calculations also showed that TWNK 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_27480" align="alignnone" width="600"] Israel Englander of Millennium Management[/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 analyze the recent hedge fund action regarding Hostess Brands, Inc. (NASDAQ:TWNK).
How are hedge funds trading Hostess Brands, Inc. (NASDAQ:TWNK)?
At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 19% from the previous quarter. By comparison, 24 hedge funds held shares or bullish call options in TWNK a year ago. With hedge funds' sentiment swirling, there exists a select group of key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
The largest stake in Hostess Brands, Inc. (NASDAQ:TWNK) was held by Cardinal Capital, which reported holding $72.8 million worth of stock at the end of September. It was followed by Millennium Management with a $27.6 million position. Other investors bullish on the company included D E Shaw, Citadel Investment Group, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Stormborn Capital Management allocated the biggest weight to Hostess Brands, Inc. (NASDAQ:TWNK), around 3.09% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, setting aside 2.4 percent of its 13F equity portfolio to TWNK.
Now, some big names have jumped into Hostess Brands, Inc. (NASDAQ:TWNK) headfirst. Armistice Capital, managed by Steven Boyd, established the most outsized position in Hostess Brands, Inc. (NASDAQ:TWNK). Armistice Capital had $8.1 million invested in the company at the end of the quarter. Elise Di Vincenzo Crumbine's Stormborn Capital Management also made a $4.9 million investment in the stock during the quarter. The following funds were also among the new TWNK investors: David Harding's Winton Capital Management, Steve Pigott's Fort Baker Capital Management, and Benjamin A. Smith's Laurion Capital Management.
Let's also examine hedge fund activity in other stocks similar to Hostess Brands, Inc. (NASDAQ:TWNK). We will take a look at BancFirst Corporation (NASDAQ:BANF), Varonis Systems Inc (NASDAQ:VRNS), Bazaarvoice Inc (NASDAQ:BV), and Healthcare Services Group, Inc. (NASDAQ:HCSG). This group of stocks' market caps match TWNK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BANF,9,46666,0 VRNS,23,409397,-1 BV,10,284642,2 HCSG,16,85990,-4 Average,14.5,206674,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $207 million. That figure was $292 million in TWNK's case. Varonis Systems Inc (NASDAQ:VRNS) is the most popular stock in this table. On the other hand BancFirst Corporation (NASDAQ:BANF) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Hostess Brands, Inc. (NASDAQ:TWNK) is more popular among hedge funds. 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. Hedge funds were also right about betting on TWNK, though not to the same extent, as the stock returned 32.4% during the same period and outperformed the market as well. 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.