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Were Hedge Funds Right About Souring On PepsiCo, Inc. (PEP)?

Asma UL Husna
·6 min read

Is PepsiCo, Inc. (NASDAQ:PEP) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

PepsiCo, Inc. (NASDAQ:PEP) was in 53 hedge funds' portfolios at the end of June. The all time high for this statistics is 65. PEP has experienced a decrease in support from the world's most elite money managers of late. There were 57 hedge funds in our database with PEP positions at the end of the first quarter. Our calculations also showed that PEP 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.

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 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.

David Siegel of Two Sigma Advisors
David Siegel of Two Sigma Advisors

David Siegel of Two Sigma Advisors

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. Now we're going to analyze the new hedge fund action encompassing PepsiCo, Inc. (NASDAQ:PEP).

How are hedge funds trading PepsiCo, Inc. (NASDAQ:PEP)?

Heading into the third quarter of 2020, a total of 53 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from one quarter earlier. By comparison, 55 hedge funds held shares or bullish call options in PEP a year ago. With hedgies' capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, AQR Capital Management, managed by Cliff Asness, holds the number one position in PepsiCo, Inc. (NASDAQ:PEP). AQR Capital Management has a $530.4 million position in the stock, comprising 0.9% of its 13F portfolio. Sitting at the No. 2 spot is Yacktman Asset Management, managed by Donald Yacktman, which holds a $432.4 million position; the fund has 6.9% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions comprise Ric Dillon's Diamond Hill Capital, D. E. Shaw's D E Shaw and John Overdeck and David Siegel's Two Sigma Advisors. In terms of the portfolio weights assigned to each position Kehrs Ridge Capital allocated the biggest weight to PepsiCo, Inc. (NASDAQ:PEP), around 12.38% of its 13F portfolio. Yacktman Asset Management is also relatively very bullish on the stock, setting aside 6.89 percent of its 13F equity portfolio to PEP.

Since PepsiCo, Inc. (NASDAQ:PEP) has faced declining sentiment from the smart money, it's safe to say that there were a few funds who were dropping their entire stakes in the second quarter. At the top of the heap, Ray Dalio's Bridgewater Associates sold off the largest investment of the "upper crust" of funds watched by Insider Monkey, worth close to $4.6 million in stock, and Dmitry Balyasny's Balyasny Asset Management was right behind this move, as the fund sold off about $1.9 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 4 funds in the second quarter.

Let's now review hedge fund activity in other stocks similar to PepsiCo, Inc. (NASDAQ:PEP). We will take a look at Pfizer Inc. (NYSE:PFE), Comcast Corporation (NASDAQ:CMCSA), Toyota Motor Corporation (NYSE:TM), AbbVie Inc (NYSE:ABBV), Oracle Corporation (NYSE:ORCL), salesforce.com, inc. (NYSE:CRM), and SAP SE (NYSE:SAP). This group of stocks' market valuations are closest to PEP's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PFE,66,2139163,-1 CMCSA,80,7207135,-3 TM,13,719379,2 ABBV,89,6226917,8 ORCL,49,2312027,1 CRM,107,9769139,-10 SAP,16,1253641,1 Average,60,4232486,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 60 hedge funds with bullish positions and the average amount invested in these stocks was $4232 million. That figure was $3157 million in PEP's case. salesforce.com, inc. (NYSE:CRM) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 13 bullish hedge fund positions. PepsiCo, Inc. (NASDAQ:PEP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for PEP is 46.7. 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. 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 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 surpassed the market by 21 percentage points. Unfortunately PEP wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); PEP investors were disappointed as the stock returned 6.3% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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