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Hedge Funds Are Cashing Out Of Shake Shack Inc (SHAK)

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In this article we are going to use hedge fund sentiment as a tool and determine whether Shake Shack Inc (NYSE:SHAK) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Is Shake Shack Inc (NYSE:SHAK) worth your attention right now? The smart money was taking a bearish view. The number of bullish hedge fund positions fell by 3 lately. Shake Shack Inc (NYSE:SHAK) was in 20 hedge funds' portfolios at the end of June. The all time high for this statistic is 29. Our calculations also showed that SHAK isn't among the 30 most popular stocks among hedge funds (click 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 S&P 500 ETFs by 79 percentage points since March 2017 (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.

Donald Sussman Paloma Partners
Donald Sussman Paloma Partners

Donald Sussman of Paloma Partners

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, plant based food market is expected to explode 100-fold by 2050, so we are checking out this under-the-radar stock. We go through lists like the 10 best growth stocks to buy to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we're going to view the fresh hedge fund action regarding Shake Shack Inc (NYSE:SHAK).

Do Hedge Funds Think SHAK Is A Good Stock To Buy Now?

Heading into the third quarter of 2021, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SHAK over the last 24 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SHAK A Good Stock To Buy?
Is SHAK A Good Stock To Buy?

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, 12 West Capital Management, managed by Joel Ramin, holds the biggest position in Shake Shack Inc (NYSE:SHAK). 12 West Capital Management has a $231.7 million position in the stock, comprising 9.7% of its 13F portfolio. Sitting at the No. 2 spot is Select Equity Group, led by Robert Joseph Caruso, holding a $102.2 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish include Christopher R. Hansen's Valiant Capital, and Anthony Bozza's Lakewood Capital Management. In terms of the portfolio weights assigned to each position 12 West Capital Management allocated the biggest weight to Shake Shack Inc (NYSE:SHAK), around 9.71% of its 13F portfolio. Valiant Capital is also relatively very bullish on the stock, designating 3.8 percent of its 13F equity portfolio to SHAK.

Since Shake Shack Inc (NYSE:SHAK) has experienced declining sentiment from the smart money, logic holds that there lies a certain "tier" of fund managers that decided to sell off their full holdings in the second quarter. Intriguingly, Renaissance Technologies said goodbye to the biggest position of the "upper crust" of funds monitored by Insider Monkey, totaling close to $26.7 million in stock. D. E. Shaw's fund, D E Shaw, also dumped its stock, about $6.6 million worth. These moves are interesting, as total hedge fund interest was cut by 3 funds in the second quarter.

Let's go over hedge fund activity in other stocks similar to Shake Shack Inc (NYSE:SHAK). We will take a look at UMB Financial Corporation (NASDAQ:UMBF), Seaboard Corporation (NYSE:SEB), Datto Holding Corp. (NYSE:MSP), Avient Corporation (NYSE:AVNT), Terreno Realty Corporation (NYSE:TRNO), Semtech Corporation (NASDAQ:SMTC), and Oscar Health, Inc. (NYSE:OSCR). This group of stocks' market valuations match SHAK's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UMBF,14,129934,1 SEB,13,129209,-1 MSP,12,3351238,-2 AVNT,20,145692,-4 TRNO,16,42148,4 SMTC,28,376303,7 OSCR,16,1050662,-10 Average,17,746455,-0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17 hedge funds with bullish positions and the average amount invested in these stocks was $746 million. That figure was $460 million in SHAK's case. Semtech Corporation (NASDAQ:SMTC) is the most popular stock in this table. On the other hand Datto Holding Corp. (NYSE:MSP) is the least popular one with only 12 bullish hedge fund positions. Shake Shack Inc (NYSE:SHAK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SHAK is 47.7. 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. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and beat the market again by 1.6 percentage points. Unfortunately SHAK wasn't nearly as popular as these 5 stocks and hedge funds that were betting on SHAK were disappointed as the stock returned -34% since the end of June (through 10/22) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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