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Were These Hedge Funds Right About Dumping Starbucks Corporation (SBUX)?

Reymerlyn Martin
·6 min read

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Starbucks Corporation (NASDAQ:SBUX).

Is Starbucks Corporation (NASDAQ:SBUX) the right pick for your portfolio? The smart money was becoming less confident. The number of long hedge fund positions decreased by 14 recently. Starbucks Corporation (NASDAQ:SBUX) was in 54 hedge funds' portfolios at the end of June. The all time high for this statistics is 68. Our calculations also showed that SBUX isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). Video: 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 a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Matthew Drapkin - Becker Drapkin Management
Matthew Drapkin - Becker Drapkin Management

Matthew Drapkin of Becker Drapkin Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind let's take a look at the latest hedge fund action regarding Starbucks Corporation (NASDAQ:SBUX).

What does smart money think about Starbucks Corporation (NASDAQ:SBUX)?

At the end of June, a total of 54 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SBUX over the last 20 quarters. With hedgies' sentiment swirling, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

More specifically, Pershing Square was the largest shareholder of Starbucks Corporation (NASDAQ:SBUX), with a stake worth $745.5 million reported as of the end of September. Trailing Pershing Square was Cedar Rock Capital, which amassed a stake valued at $595.7 million. Fisher Asset Management, D E Shaw, and Citadel Investment Group 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 Pacifica Capital Investments allocated the biggest weight to Starbucks Corporation (NASDAQ:SBUX), around 15.38% of its 13F portfolio. Cedar Rock Capital is also relatively very bullish on the stock, designating 14.49 percent of its 13F equity portfolio to SBUX.

Due to the fact that Starbucks Corporation (NASDAQ:SBUX) has witnessed declining sentiment from the smart money, it's easy to see that there lies a certain "tier" of hedgies that elected to cut their positions entirely last quarter. Interestingly, Tim Hurd and Ed Magnus's BlueSpruce Investments cut the largest investment of the 750 funds monitored by Insider Monkey, valued at about $157.1 million in stock, and Eashwar Krishnan's Tybourne Capital Management was right behind this move, as the fund sold off about $86.3 million worth. These transactions are important to note, as total hedge fund interest was cut by 14 funds last quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Starbucks Corporation (NASDAQ:SBUX) but similarly valued. We will take a look at CVS Health Corporation (NYSE:CVS), Sony Corporation (NYSE:SNE), HDFC Bank Limited (NYSE:HDB), Fidelity National Information Services Inc. (NYSE:FIS), BlackRock, Inc. (NYSE:BLK), Toronto-Dominion Bank (NYSE:TD), and S&P Global Inc. (NYSE:SPGI). This group of stocks' market values resemble SBUX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CVS,65,1136206,-6 SNE,28,598881,0 HDB,42,1177218,4 FIS,111,8173639,6 BLK,37,702091,-1 TD,15,155444,-4 SPGI,71,3024689,-2 Average,52.7,2138310,-0.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 52.7 hedge funds with bullish positions and the average amount invested in these stocks was $2138 million. That figure was $2683 million in SBUX's case. Fidelity National Information Services Inc. (NYSE:FIS) is the most popular stock in this table. On the other hand Toronto-Dominion Bank (NYSE:TD) is the least popular one with only 15 bullish hedge fund positions. Starbucks Corporation (NASDAQ:SBUX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SBUX is 35.1. 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. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on SBUX as the stock returned 24.1% since the end of Q2 (through 10/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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