Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ a complex analysis to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space.
J&J Snack Foods Corp. (NASDAQ:JJSF) was in 14 hedge funds' portfolios at the end of March. JJSF investors should pay attention to an increase in enthusiasm from smart money of late. There were 10 hedge funds in our database with JJSF holdings at the end of the previous quarter. Our calculations also showed that JJSF isn't among the 30 most popular stocks among hedge funds.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
Let's take a gander at the recent hedge fund action encompassing J&J Snack Foods Corp. (NASDAQ:JJSF).
What does smart money think about J&J Snack Foods Corp. (NASDAQ:JJSF)?
At Q1's end, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of 40% from one quarter earlier. On the other hand, there were a total of 8 hedge funds with a bullish position in JJSF a year ago. With hedgies' sentiment swirling, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
The largest stake in J&J Snack Foods Corp. (NASDAQ:JJSF) was held by Renaissance Technologies, which reported holding $62.7 million worth of stock at the end of March. It was followed by Winton Capital Management with a $7.8 million position. Other investors bullish on the company included GAMCO Investors, Fisher Asset Management, and GLG Partners.
Now, key money managers were leading the bulls' herd. D E Shaw, managed by D. E. Shaw, established the largest position in J&J Snack Foods Corp. (NASDAQ:JJSF). D E Shaw had $0.6 million invested in the company at the end of the quarter. Lee Ainslie's Maverick Capital also made a $0.4 million investment in the stock during the quarter. The following funds were also among the new JJSF investors: Paul Tudor Jones's Tudor Investment Corp and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital.
Let's also examine hedge fund activity in other stocks similar to J&J Snack Foods Corp. (NASDAQ:JJSF). These stocks are Global Blood Therapeutics Inc (NASDAQ:GBT), Cedar Fair, L.P. (NYSE:FUN), Exponent, Inc. (NASDAQ:EXPO), and CommVault Systems, Inc. (NASDAQ:CVLT). This group of stocks' market caps are closest to JJSF's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GBT,26,730224,1 FUN,8,56848,-2 EXPO,18,111457,2 CVLT,29,390000,6 Average,20.25,322132,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $322 million. That figure was $96 million in JJSF's case. CommVault Systems, Inc. (NASDAQ:CVLT) is the most popular stock in this table. On the other hand Cedar Fair, L.P. (NYSE:FUN) is the least popular one with only 8 bullish hedge fund positions. J&J Snack Foods Corp. (NASDAQ:JJSF) 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on JJSF, though not to the same extent, as the stock returned 3.9% during the same time frame and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.