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Hedge Fund Favorites vs. StoneCo Ltd. (STNE) In 2019

Nina Todic

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about StoneCo Ltd. (NASDAQ:STNE)?

Is StoneCo Ltd. (NASDAQ:STNE) the right investment to pursue these days? Investors who are in the know are betting on the stock. The number of bullish hedge fund positions went up by 1 recently. Our calculations also showed that STNE 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_26388" align="aligncenter" width="468"] Lee Ainslie of Maverick Capital[/caption]

Lee Ainslie MAVERICK CAPITAL

We leave no stone unturned when looking for the next great investment idea. For example 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. 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 we're going to take a gander at the fresh hedge fund action encompassing StoneCo Ltd. (NASDAQ:STNE).

How have hedgies been trading StoneCo Ltd. (NASDAQ:STNE)?

At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards STNE over the last 17 quarters. With hedgies' capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

According to Insider Monkey's hedge fund database, Berkshire Hathaway, managed by Warren Buffett, holds the largest position in StoneCo Ltd. (NASDAQ:STNE). Berkshire Hathaway has a $492.7 million position in the stock, comprising 0.2% of its 13F portfolio. The second most bullish fund manager is Whale Rock Capital Management, managed by Alex Sacerdote, which holds a $116.8 million position; the fund has 2.2% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish encompass Lee Ainslie's Maverick Capital, Robert Pitts's Steadfast Capital Management and Philippe Laffont's Coatue Management. In terms of the portfolio weights assigned to each position Cartica Management allocated the biggest weight to StoneCo Ltd. (NASDAQ:STNE), around 40.54% of its 13F portfolio. Prince Street Capital Management is also relatively very bullish on the stock, setting aside 9.1 percent of its 13F equity portfolio to STNE.

As aggregate interest increased, some big names were breaking ground themselves. Light Street Capital, managed by Glen Kacher, initiated the biggest position in StoneCo Ltd. (NASDAQ:STNE). Light Street Capital had $44.5 million invested in the company at the end of the quarter. Nitin Saigal and Dan Jacobs's Kora Management also initiated a $16.3 million position during the quarter. The following funds were also among the new STNE investors: David Halpert's Prince Street Capital Management, James Dondero's Highland Capital Management, and Peter Muller's PDT Partners.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as StoneCo Ltd. (NASDAQ:STNE) but similarly valued. We will take a look at Apache Corporation (NYSE:APA), United Rentals, Inc. (NYSE:URI), Formula One Group (NASDAQ:FWONK), and Avery Dennison Corporation (NYSE:AVY). This group of stocks' market values are similar to STNE's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APA,26,692560,4 URI,54,1123521,10 FWONK,30,1915502,-2 AVY,22,125790,1 Average,33,964343,3.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $964 million. That figure was $1337 million in STNE's case. United Rentals, Inc. (NYSE:URI) is the most popular stock in this table. On the other hand Avery Dennison Corporation (NYSE:AVY) is the least popular one with only 22 bullish hedge fund positions. StoneCo Ltd. (NASDAQ:STNE) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on STNE as the stock returned 106.8% in 2019 through December 23rd and outperformed the market by an even larger margin. 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.

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