Hedge funds are known to underperform the bull markets but that's not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds' consensus picks on average deliver market beating returns. For example in the first 9 months of this year through September 30th the Standard and Poor’s 500 Index returned approximately 20% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds' purchases. We know better. That's why we scrutinize hedge fund sentiment before we invest in a stock like Shake Shack Inc (NYSE:SHAK).
Shake Shack Inc (NYSE:SHAK) investors should be aware of an increase in activity from the world's largest hedge funds lately. SHAK was in 27 hedge funds' portfolios at the end of the second quarter of 2019. There were 19 hedge funds in our database with SHAK positions at the end of the previous quarter. Our calculations also showed that SHAK isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's view the latest hedge fund action encompassing Shake Shack Inc (NYSE:SHAK).
Hedge fund activity in Shake Shack Inc (NYSE:SHAK)
Heading into the third quarter of 2019, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 42% from the previous quarter. On the other hand, there were a total of 21 hedge funds with a bullish position in SHAK a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, 12 West Capital Management was the largest shareholder of Shake Shack Inc (NYSE:SHAK), with a stake worth $187.6 million reported as of the end of March. Trailing 12 West Capital Management was Renaissance Technologies, which amassed a stake valued at $97.8 million. Bridger Management, Balyasny Asset Management, and Greenlea Lane Capital were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, key money managers were leading the bulls' herd. ZWEIG DIMENNA PARTNERS, managed by Joe DiMenna, established the most valuable position in Shake Shack Inc (NYSE:SHAK). ZWEIG DIMENNA PARTNERS had $7.2 million invested in the company at the end of the quarter. Brad Farber's Atika Capital also initiated a $6.9 million position during the quarter. The following funds were also among the new SHAK investors: Andrew Sandler's Sandler Capital Management, Frank Slattery's Symmetry Peak Management, and Noam Gottesman's GLG Partners.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Shake Shack Inc (NYSE:SHAK) but similarly valued. These stocks are Green Dot Corporation (NYSE:GDOT), Trinity Industries, Inc. (NYSE:TRN), Lions Gate Entertainment Corp. (NYSE:LGF-B), and Cirrus Logic, Inc. (NASDAQ:CRUS). This group of stocks' market valuations are similar to SHAK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GDOT,18,242981,-9 TRN,23,664414,-5 LGF-B,15,238109,-1 CRUS,23,289863,6 Average,19.75,358842,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $359 million. That figure was $440 million in SHAK's case. Trinity Industries, Inc. (NYSE:TRN) is the most popular stock in this table. On the other hand Lions Gate Entertainment Corp. (NYSE:LGF-B) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Shake Shack Inc (NYSE:SHAK) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on SHAK as the stock returned 35.8% during Q3 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.