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Hedge Funds Are Selling Shake Shack Inc (SHAK)

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In this article you are going to find out whether hedge funds think Shake Shack Inc (NYSE:SHAK) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Shake Shack Inc (NYSE:SHAK) undervalued? The smart money was in a pessimistic mood. The number of long hedge fund positions were trimmed by 2 in recent months. Shake Shack Inc (NYSE:SHAK) was in 23 hedge funds' portfolios at the end of March. The all time high for this statistic is 29. Our calculations also showed that SHAK isn't among the 30 most popular stocks among hedge funds (click for Q1 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 115 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Michael Platt BlueCrest Capital
Michael Platt BlueCrest Capital

Michael Platt of BlueCrest Capital Mgmt.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we're going to review the new hedge fund action regarding Shake Shack Inc (NYSE:SHAK).

Do Hedge Funds Think SHAK Is A Good Stock To Buy Now?

At Q1's end, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SHAK over the last 23 quarters. With hedge funds' sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, 12 West Capital Management held the most valuable stake in Shake Shack Inc (NYSE:SHAK), which was worth $253.3 million at the end of the fourth quarter. On the second spot was Select Equity Group which amassed $161.1 million worth of shares. Valiant Capital, Citadel Investment Group, and Renaissance Technologies 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 12 West Capital Management allocated the biggest weight to Shake Shack Inc (NYSE:SHAK), around 12.07% of its 13F portfolio. Bandera Partners is also relatively very bullish on the stock, setting aside 2.8 percent of its 13F equity portfolio to SHAK.

Judging by the fact that Shake Shack Inc (NYSE:SHAK) has experienced falling interest from the aggregate hedge fund industry, it's safe to say that there exists a select few hedge funds who sold off their entire stakes heading into Q2. Interestingly, Principal Global Investors's Columbus Circle Investors sold off the biggest investment of the "upper crust" of funds monitored by Insider Monkey, valued at an estimated $17.2 million in stock, and Ben Jacobs's Anomaly Capital Management was right behind this move, as the fund sold off about $16.4 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 2 funds heading into Q2.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Shake Shack Inc (NYSE:SHAK) but similarly valued. These stocks are Neogen Corporation (NASDAQ:NEOG), Valvoline Inc. (NYSE:VVV), The Hanover Insurance Group, Inc. (NYSE:THG), Sabre Corporation (NASDAQ:SABR), TTEC Holdings, Inc. (NASDAQ:TTEC), nVent Electric plc (NYSE:NVT), and MGIC Investment Corporation (NYSE:MTG). All of these stocks' market caps match SHAK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NEOG,10,29017,-6 VVV,23,677540,-4 THG,18,95544,-2 SABR,40,1280794,-6 TTEC,10,55504,0 NVT,31,338555,1 MTG,28,268803,1 Average,22.9,392251,-2.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.9 hedge funds with bullish positions and the average amount invested in these stocks was $392 million. That figure was $560 million in SHAK's case. Sabre Corporation (NASDAQ:SABR) is the most popular stock in this table. On the other hand Neogen Corporation (NASDAQ:NEOG) is the least popular one with only 10 bullish hedge fund positions. Shake Shack Inc (NYSE:SHAK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SHAK is 48.5. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and beat the market again by 7.7 percentage points. Unfortunately SHAK wasn't nearly as popular as these 5 stocks and hedge funds that were betting on SHAK were disappointed as the stock returned -17.8% since the end of March (through 7/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.