How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Hostess Brands, Inc. (NASDAQ:TWNK) and determine whether hedge funds had an edge regarding this stock.
Is Hostess Brands, Inc. (NASDAQ:TWNK) going to take off soon? Money managers were reducing their bets on the stock. The number of long hedge fund bets decreased by 6 recently. Hostess Brands, Inc. (NASDAQ:TWNK) was in 24 hedge funds' portfolios at the end of June. The all time high for this statistics is 37. Our calculations also showed that TWNK 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). There were 30 hedge funds in our database with TWNK holdings at the end of March. 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.
Israel Englander of Millennium Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Now we're going to review the new hedge fund action surrounding Hostess Brands, Inc. (NASDAQ:TWNK).
What have hedge funds been doing with Hostess Brands, Inc. (NASDAQ:TWNK)?
At the end of June, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the previous quarter. On the other hand, there were a total of 26 hedge funds with a bullish position in TWNK a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
The largest stake in Hostess Brands, Inc. (NASDAQ:TWNK) was held by Cardinal Capital, which reported holding $79.1 million worth of stock at the end of September. It was followed by Millennium Management with a $30 million position. Other investors bullish on the company included Armistice Capital, Renaissance Technologies, and Aristeia Capital. In terms of the portfolio weights assigned to each position Fort Baker Capital Management allocated the biggest weight to Hostess Brands, Inc. (NASDAQ:TWNK), around 4.45% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, earmarking 3.3 percent of its 13F equity portfolio to TWNK.
Seeing as Hostess Brands, Inc. (NASDAQ:TWNK) has faced bearish sentiment from hedge fund managers, logic holds that there was a specific group of hedge funds that elected to cut their positions entirely by the end of the second quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the largest position of the 750 funds tracked by Insider Monkey, valued at an estimated $5.6 million in stock. Paul Marshall and Ian Wace's fund, Marshall Wace LLP, also said goodbye to its stock, about $3.1 million worth. These moves are interesting, as aggregate hedge fund interest fell by 6 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 Hostess Brands, Inc. (NASDAQ:TWNK) but similarly valued. We will take a look at Avis Budget Group Inc. (NASDAQ:CAR), United States Steel Corporation (NYSE:X), Sonos, Inc. (NASDAQ:SONO), Mersana Therapeutics, Inc. (NASDAQ:MRSN), Walker & Dunlop Inc. (NYSE:WD), Intercept Pharmaceuticals Inc (NASDAQ:ICPT), and Spirit Airlines Incorporated (NYSE:SAVE). 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 CAR,21,672517,-2 X,20,54402,3 SONO,35,327682,2 MRSN,25,581618,8 WD,18,73653,-1 ICPT,22,215147,3 SAVE,23,98598,-5 Average,23.4,289088,1.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.4 hedge funds with bullish positions and the average amount invested in these stocks was $289 million. That figure was $212 million in TWNK's case. Sonos, Inc. (NASDAQ:SONO) is the most popular stock in this table. On the other hand Walker & Dunlop Inc. (NYSE:WD) is the least popular one with only 18 bullish hedge fund positions. Hostess Brands, Inc. (NASDAQ:TWNK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TWNK is 36.1. 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 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately TWNK wasn't nearly as popular as these 10 stocks and hedge funds that were betting on TWNK were disappointed as the stock returned 1.9% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
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Disclosure: None. This article was originally published at Insider Monkey.