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Were Hedge Funds Right About Flocking Into Freshpet Inc (FRPT) ?

Reymerlyn Martin

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Freshpet Inc (NASDAQ:FRPT).

Freshpet Inc (NASDAQ:FRPT) shareholders have witnessed an increase in activity from the world's largest hedge funds of late. Our calculations also showed that FRPT isn't among the 30 most popular stocks among hedge funds.

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 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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Richard Driehaus

Let's take a peek at the new hedge fund action regarding Freshpet Inc (NASDAQ:FRPT).

Hedge fund activity in Freshpet Inc (NASDAQ:FRPT)

At Q4's end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 62% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in FRPT over the last 14 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

FRPT_apr2019

The largest stake in Freshpet Inc (NASDAQ:FRPT) was held by Driehaus Capital, which reported holding $14.1 million worth of stock at the end of December. It was followed by Rock Springs Capital Management with a $7.6 million position. Other investors bullish on the company included Renaissance Technologies, Manatuck Hill Partners, and Islet Management.

As industrywide interest jumped, key hedge funds have jumped into Freshpet Inc (NASDAQ:FRPT) headfirst. Rock Springs Capital Management, managed by Kris Jenner, Gordon Bussard, Graham McPhail, established the largest position in Freshpet Inc (NASDAQ:FRPT). Rock Springs Capital Management had $7.6 million invested in the company at the end of the quarter. Joseph Samuels's Islet Management also initiated a $5 million position during the quarter. The other funds with brand new FRPT positions are Israel Englander's Millennium Management, Matthew Hulsizer's PEAK6 Capital Management, and Sander Gerber's Hudson Bay Capital Management.

Let's also examine hedge fund activity in other stocks similar to Freshpet Inc (NASDAQ:FRPT). These stocks are ATN International, Inc. (NASDAQ:ATNI), Gibraltar Industries Inc (NASDAQ:ROCK), First Majestic Silver Corp (NYSE:AG), and Bright Scholar Education Holdings Limited (NYSE:BEDU). All of these stocks' market caps resemble FRPT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATNI,10,73263,2 ROCK,10,86045,-2 AG,10,12089,0 BEDU,8,90359,-2 Average,9.5,65439,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 9.5 hedge funds with bullish positions and the average amount invested in these stocks was $65 million. That figure was $58 million in FRPT's case. ATN International, Inc. (NASDAQ:ATNI) is the most popular stock in this table. On the other hand Bright Scholar Education Holdings Limited (NYSE:BEDU) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Freshpet Inc (NASDAQ:FRPT) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on FRPT as the stock returned 30.6% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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