Were Hedge Funds Right About Dumping Lamb Weston Holdings, Inc. (LW)?
We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Lamb Weston Holdings, Inc. (NYSE:LW) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Lamb Weston Holdings, Inc. (NYSE:LW) has seen a decrease in enthusiasm from smart money in recent months. LW was in 32 hedge funds' portfolios at the end of December. There were 35 hedge funds in our database with LW holdings at the end of the previous quarter. Our calculations also showed that LW isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 percentage points since March 2017 (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 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_26340" align="aligncenter" width="400"]
Ken Griffin of Citadel Investment Group[/caption]
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now we're going to take a look at the recent hedge fund action surrounding Lamb Weston Holdings, Inc. (NYSE:LW).
Hedge fund activity in Lamb Weston Holdings, Inc. (NYSE:LW)
Heading into the first quarter of 2020, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LW over the last 18 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Park Presidio Capital held the most valuable stake in Lamb Weston Holdings, Inc. (NYSE:LW), which was worth $68.8 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $61.2 million worth of shares. AQR Capital Management, Renaissance Technologies, and Marshall Wace LLP 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 Park Presidio Capital allocated the biggest weight to Lamb Weston Holdings, Inc. (NYSE:LW), around 7.66% of its 13F portfolio. Grisanti Brown & Partners is also relatively very bullish on the stock, earmarking 3.68 percent of its 13F equity portfolio to LW.
Seeing as Lamb Weston Holdings, Inc. (NYSE:LW) has experienced bearish sentiment from the aggregate hedge fund industry, logic holds that there were a few hedgies that decided to sell off their positions entirely heading into Q4. Interestingly, Oscar Hattink's BlueDrive Global Investors dropped the biggest position of the "upper crust" of funds followed by Insider Monkey, worth close to $47.9 million in stock. Ryan Pedlow's fund, Two Creeks Capital Management, also said goodbye to its stock, about $46.8 million worth. These transactions are interesting, as total hedge fund interest dropped by 3 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks similar to Lamb Weston Holdings, Inc. (NYSE:LW). These stocks are Universal Health Services, Inc. (NYSE:UHS), American Airlines Group Inc (NASDAQ:AAL), United Rentals, Inc. (NYSE:URI), and InterContinental Hotels Group PLC (NYSE:IHG). This group of stocks' market valuations match LW's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UHS,31,483243,3 AAL,41,2005005,-2 URI,54,1223368,-5 IHG,6,27333,-1 Average,33,934737,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $935 million. That figure was $382 million in LW's case. United Rentals, Inc. (NYSE:URI) is the most popular stock in this table. On the other hand InterContinental Hotels Group PLC (NYSE:IHG) is the least popular one with only 6 bullish hedge fund positions. Lamb Weston Holdings, Inc. (NYSE:LW) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately LW wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); LW investors were disappointed as the stock returned -38.9% during the same time 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 most of these stocks already outperformed the market in Q1.
Disclosure: None. This article was originally published at Insider Monkey.
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