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We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let's see whether Hostess Brands, Inc. (NASDAQ:TWNK) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.
Hostess Brands, Inc. (NASDAQ:TWNK) was in 37 hedge funds' portfolios at the end of December. TWNK investors should be aware of an increase in hedge fund sentiment in recent months. There were 33 hedge funds in our database with TWNK positions at the end of the previous quarter. Our calculations also showed that TWNK isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
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Israel Englander of Millennium Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind let's go over the recent 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 the fourth quarter, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from the previous quarter. The graph below displays the number of hedge funds with bullish position in TWNK over the last 18 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
More specifically, Cardinal Capital was the largest shareholder of Hostess Brands, Inc. (NASDAQ:TWNK), with a stake worth $79.7 million reported as of the end of September. Trailing Cardinal Capital was Millennium Management, which amassed a stake valued at $31 million. D E Shaw, Aristeia Capital, and Balyasny Asset Management 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 Cardinal Capital allocated the biggest weight to Hostess Brands, Inc. (NASDAQ:TWNK), around 2.43% of its 13F portfolio. Highbridge Capital Management is also relatively very bullish on the stock, setting aside 1.69 percent of its 13F equity portfolio to TWNK.
As one would reasonably expect, specific money managers have jumped into Hostess Brands, Inc. (NASDAQ:TWNK) headfirst. Islet Management, managed by Joseph Samuels, assembled the biggest position in Hostess Brands, Inc. (NASDAQ:TWNK). Islet Management had $9.2 million invested in the company at the end of the quarter. Brian Scudieri's Kehrs Ridge Capital also initiated a $3.5 million position during the quarter. The other funds with new positions in the stock are Brandon Haley's Holocene Advisors, Qing Li's Sciencast Management, and Hoon Kim's Quantinno Capital.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Hostess Brands, Inc. (NASDAQ:TWNK) but similarly valued. These stocks are Intra-Cellular Therapies Inc (NASDAQ:ITCI), Mueller Water Products, Inc. (NYSE:MWA), Pacira Pharmaceuticals Inc (NASDAQ:PCRX), and Badger Meter, Inc. (NYSE:BMI). This group of stocks' market values are similar to TWNK's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ITCI,12,135601,1 MWA,20,276558,-3 PCRX,28,408153,-3 BMI,20,178333,2 Average,20,249661,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $250 million. That figure was $289 million in TWNK's case. Pacira Pharmaceuticals Inc (NASDAQ:PCRX) is the most popular stock in this table. On the other hand Intra-Cellular Therapies Inc (NASDAQ:ITCI) is the least popular one with only 12 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th and still beat the market by 4.2 percentage points. Unfortunately TWNK wasn't nearly as popular as these 20 stocks and hedge funds that were betting on TWNK were disappointed as the stock returned -23.3% during the three months of 2020 (through April 6th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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.