Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Post Holdings Inc (NYSE:POST).
Is Post Holdings Inc (NYSE:POST) a healthy stock for your portfolio? Money managers are buying. The number of bullish hedge fund bets rose by 2 recently. Our calculations also showed that POST isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_27666" align="aligncenter" width="479"] Roberto Mignone of Bridger Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's analyze the latest hedge fund action encompassing Post Holdings Inc (NYSE:POST).
What does smart money think about Post Holdings Inc (NYSE:POST)?
At Q3's end, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the second quarter of 2019. By comparison, 29 hedge funds held shares or bullish call options in POST a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Route One Investment Company was the largest shareholder of Post Holdings Inc (NYSE:POST), with a stake worth $650.7 million reported as of the end of September. Trailing Route One Investment Company was Iridian Asset Management, which amassed a stake valued at $198.2 million. Diamond Hill Capital, Bridger Management, 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 Route One Investment Company allocated the biggest weight to Post Holdings Inc (NYSE:POST), around 19.62% of its portfolio. Freshford Capital Management is also relatively very bullish on the stock, earmarking 8.03 percent of its 13F equity portfolio to POST.
As aggregate interest increased, specific money managers have jumped into Post Holdings Inc (NYSE:POST) headfirst. One Fin Capital Management, managed by David MacKnight, established the largest position in Post Holdings Inc (NYSE:POST). One Fin Capital Management had $11.2 million invested in the company at the end of the quarter. James Dinan's York Capital Management also initiated a $9.9 million position during the quarter. The other funds with brand new POST positions are Sander Gerber's Hudson Bay Capital Management, Matthew Tewksbury's Stevens Capital Management, and John A. Levin's Levin Capital Strategies.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Post Holdings Inc (NYSE:POST) but similarly valued. We will take a look at DXC Technology Company (NYSE:DXC), Assurant, Inc. (NYSE:AIZ), Graco Inc. (NYSE:GGG), and Hyatt Hotels Corporation (NYSE:H). This group of stocks' market caps match POST's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DXC,34,1144765,-7 AIZ,27,905471,-2 GGG,19,187451,-5 H,28,932324,5 Average,27,792503,-2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $793 million. That figure was $1466 million in POST's case. DXC Technology Company (NYSE:DXC) is the most popular stock in this table. On the other hand Graco Inc. (NYSE:GGG) is the least popular one with only 19 bullish hedge fund positions. Post Holdings Inc (NYSE:POST) 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately POST wasn't nearly as popular as these 20 stocks and hedge funds that were betting on POST were disappointed as the stock returned -0.2% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.