How do we determine whether El Pollo LoCo Holdings Inc (NASDAQ:LOCO) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Hedge fund interest in El Pollo LoCo Holdings Inc (NASDAQ:LOCO) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare LOCO to other stocks including Triple-S Management Corp. (NYSE:GTS), REX American Resources Corp (NYSE:REX), and Ichor Holdings, Ltd. (NASDAQ:ICHR) to get a better sense of its popularity.
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 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.
Let's review the latest hedge fund action regarding El Pollo LoCo Holdings Inc (NASDAQ:LOCO).
What have hedge funds been doing with El Pollo LoCo Holdings Inc (NASDAQ:LOCO)?
At Q1's end, a total of 16 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in LOCO over the last 15 quarters. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Among these funds, Royce & Associates held the most valuable stake in El Pollo LoCo Holdings Inc (NASDAQ:LOCO), which was worth $6.5 million at the end of the first quarter. On the second spot was Maverick Capital which amassed $4.9 million worth of shares. Moreover, Driehaus Capital, Two Sigma Advisors, and Renaissance Technologies were also bullish on El Pollo LoCo Holdings Inc (NASDAQ:LOCO), allocating a large percentage of their portfolios to this stock.
Since El Pollo LoCo Holdings Inc (NASDAQ:LOCO) has witnessed declining sentiment from hedge fund managers, we can see that there were a few hedgies that elected to cut their full holdings in the third quarter. Interestingly, David Harding's Winton Capital Management sold off the largest investment of the "upper crust" of funds tracked by Insider Monkey, worth an estimated $4.3 million in stock, and David Costen Haley's HBK Investments was right behind this move, as the fund dumped about $0.7 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as El Pollo LoCo Holdings Inc (NASDAQ:LOCO) but similarly valued. We will take a look at Triple-S Management Corp.(NYSE:GTS), REX American Resources Corp (NYSE:REX), Ichor Holdings, Ltd. (NASDAQ:ICHR), and Collegium Pharmaceutical Inc (NASDAQ:COLL). This group of stocks' market valuations are closest to LOCO's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GTS,12,76726,0 REX,6,41966,-1 ICHR,10,54349,3 COLL,20,87240,7 Average,12,65070,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $65 million. That figure was $27 million in LOCO's case. Collegium Pharmaceutical Inc (NASDAQ:COLL) is the most popular stock in this table. On the other hand REX American Resources Corp (NYSE:REX) is the least popular one with only 6 bullish hedge fund positions. El Pollo LoCo Holdings Inc (NASDAQ:LOCO) is not the most popular stock in this group but hedge fund interest is still above average. 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 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. Unfortunately LOCO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on LOCO were disappointed as the stock returned -17.1% during the same 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 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.