We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Sprouts Farmers Market Inc (NASDAQ:SFM).
Sprouts Farmers Market Inc (NASDAQ:SFM) has seen an increase in hedge fund interest of late. Our calculations also showed that SFM 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.
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 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 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 stocks that are in our short portfolio.
[caption id="attachment_30602" align="aligncenter" width="489"] Philippe Laffont of Coatue 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 take a gander at the new hedge fund action encompassing Sprouts Farmers Market Inc (NASDAQ:SFM).
How have hedgies been trading Sprouts Farmers Market Inc (NASDAQ:SFM)?
At Q3's end, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from one quarter earlier. On the other hand, there were a total of 19 hedge funds with a bullish position in SFM a year ago. With hedge funds' sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Among these funds, Renaissance Technologies held the most valuable stake in Sprouts Farmers Market Inc (NASDAQ:SFM), which was worth $132.9 million at the end of the third quarter. On the second spot was Impax Asset Management which amassed $36.8 million worth of shares. D E Shaw, AQR Capital Management, and Winton Capital Management 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 Signition LP allocated the biggest weight to Sprouts Farmers Market Inc (NASDAQ:SFM), around 0.79% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, earmarking 0.48 percent of its 13F equity portfolio to SFM.
As aggregate interest increased, key hedge funds were breaking ground themselves. Marshall Wace, managed by Paul Marshall and Ian Wace, created the largest position in Sprouts Farmers Market Inc (NASDAQ:SFM). Marshall Wace had $9.3 million invested in the company at the end of the quarter. Philippe Laffont's Coatue Management also initiated a $3.3 million position during the quarter. The only other fund with a new position in the stock is Hoon Kim's Quantinno Capital.
Let's now review hedge fund activity in other stocks similar to Sprouts Farmers Market Inc (NASDAQ:SFM). We will take a look at SVMK Inc. (NASDAQ:SVMK), Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), Covanta Holding Corporation (NYSE:CVA), and Alamos Gold Inc (NYSE:AGI). This group of stocks' market values are similar to SFM's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SVMK,24,277503,1 ARNA,29,293133,0 CVA,14,102739,-1 AGI,15,220502,3 Average,20.5,223469,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $223 million. That figure was $325 million in SFM's case. Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) is the most popular stock in this table. On the other hand Covanta Holding Corporation (NYSE:CVA) is the least popular one with only 14 bullish hedge fund positions. Sprouts Farmers Market Inc (NASDAQ:SFM) 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 SFM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on SFM were disappointed as the stock returned 2.4% 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.