U.S. Markets closed

Hedge Fund Favorites vs. Starbucks Corporation (SBUX) In 2019

Reymerlyn Martin

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% in 2019. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Starbucks Corporation (NASDAQ:SBUX).

Is Starbucks Corporation (NASDAQ:SBUX) undervalued? Prominent investors are taking a bullish view. The number of long hedge fund bets increased by 3 lately. Our calculations also showed that SBUX 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). SBUX was in 52 hedge funds' portfolios at the end of the third quarter of 2019. There were 49 hedge funds in our database with SBUX holdings at the end of the previous quarter.

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_607931" align="aligncenter" width="600"] Bill Ackman of Pershing Square[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Keeping this in mind let's take a look at the fresh hedge fund action surrounding Starbucks Corporation (NASDAQ:SBUX).

How are hedge funds trading Starbucks Corporation (NASDAQ:SBUX)?

Heading into the fourth quarter of 2019, a total of 52 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SBUX over the last 17 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Arrowstreet Capital held the most valuable stake in Starbucks Corporation (NASDAQ:SBUX), which was worth $870.3 million at the end of the third quarter. On the second spot was Pershing Square which amassed $823.5 million worth of shares. Cedar Rock Capital, Renaissance Technologies, and Two Sigma Advisors 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 Cedar Rock Capital allocated the biggest weight to Starbucks Corporation (NASDAQ:SBUX), around 18.75% of its 13F portfolio. Pacifica Capital Investments is also relatively very bullish on the stock, setting aside 17.08 percent of its 13F equity portfolio to SBUX.

As industrywide interest jumped, key hedge funds were leading the bulls' herd. Junto Capital Management, managed by James Parsons, created the most valuable position in Starbucks Corporation (NASDAQ:SBUX). Junto Capital Management had $56.5 million invested in the company at the end of the quarter. Frank Brosens's Taconic Capital also initiated a $13.3 million position during the quarter. The other funds with brand new SBUX positions are Benjamin A. Smith's Laurion Capital Management, David Costen Haley's HBK Investments, and Donald Sussman's Paloma Partners.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Starbucks Corporation (NASDAQ:SBUX) but similarly valued. We will take a look at Linde plc (NYSE:LIN), ASML Holding N.V. (NASDAQ:ASML), Danaher Corporation (NYSE:DHR), and United Parcel Service, Inc. (NYSE:UPS). This group of stocks' market caps are similar to SBUX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LIN,44,2523402,3 ASML,15,774677,3 DHR,57,2732120,-1 UPS,41,1365649,5 Average,39.25,1848962,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.25 hedge funds with bullish positions and the average amount invested in these stocks was $1849 million. That figure was $5594 million in SBUX's case. Danaher Corporation (NYSE:DHR) is the most popular stock in this table. On the other hand ASML Holding N.V. (NASDAQ:ASML) is the least popular one with only 15 bullish hedge fund positions. Starbucks Corporation (NASDAQ:SBUX) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on SBUX, though not to the same extent, as the stock returned 39.1% during 2019 and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

Related Content