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Were These Hedge Funds Wrong About Crowding Into Papa John’s International, Inc. (PZZA)?

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In this article we will take a look at whether hedge funds think Papa John's International, Inc. (NASDAQ:PZZA) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Papa John's International, Inc. (NASDAQ:PZZA) has experienced an increase in hedge fund interest lately. Papa John's International, Inc. (NASDAQ:PZZA) was in 34 hedge funds' portfolios at the end of June. The all time high for this statistics is 29. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that PZZA 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ryan Frick Dorsal Capital
Ryan Frick Dorsal Capital

Ryan Frick of Dorsal Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. 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 check out the recent hedge fund action regarding Papa John's International, Inc. (NASDAQ:PZZA).

How have hedgies been trading Papa John's International, Inc. (NASDAQ:PZZA)?

At the end of June, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards PZZA over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is PZZA A Good Stock To Buy?
Is PZZA A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of Papa John's International, Inc. (NASDAQ:PZZA), with a stake worth $95.4 million reported as of the end of June. Trailing Renaissance Technologies was Arrowstreet Capital, which amassed a stake valued at $52.8 million. Dorsal Capital Management, Scopus Asset Management, and Two Sigma Advisors 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 MIK Capital allocated the biggest weight to Papa John's International, Inc. (NASDAQ:PZZA), around 8.35% of its 13F portfolio. Stormborn Capital Management is also relatively very bullish on the stock, setting aside 8.23 percent of its 13F equity portfolio to PZZA.

Now, key hedge funds have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the biggest position in Papa John's International, Inc. (NASDAQ:PZZA). Arrowstreet Capital had $52.8 million invested in the company at the end of the quarter. Alexander Mitchell's Scopus Asset Management also made a $26.8 million investment in the stock during the quarter. The following funds were also among the new PZZA investors: Kamyar Khajavi's MIK Capital, Peter Muller's PDT Partners, and Elise Di Vincenzo Crumbine's Stormborn Capital Management.

Let's now take a look at hedge fund activity in other stocks similar to Papa John's International, Inc. (NASDAQ:PZZA). We will take a look at Sanderson Farms, Inc. (NASDAQ:SAFM), Rapid7 Inc (NASDAQ:RPD), Ping Identity Holding Corp. (NYSE:PING), EPR Properties (NYSE:EPR), Stitch Fix, Inc. (NASDAQ:SFIX), Denali Therapeutics Inc. (NASDAQ:DNLI), and Artisan Partners Asset Management Inc (NYSE:APAM). All of these stocks' market caps are similar to PZZA's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SAFM,22,205175,5 RPD,14,64535,-2 PING,15,73422,4 EPR,23,328921,0 SFIX,28,219372,12 DNLI,21,99880,7 APAM,21,262058,1 Average,20.6,179052,3.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.6 hedge funds with bullish positions and the average amount invested in these stocks was $179 million. That figure was $404 million in PZZA's case. Stitch Fix, Inc. (NASDAQ:SFIX) is the most popular stock in this table. On the other hand Rapid7 Inc (NASDAQ:RPD) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Papa John's International, Inc. (NASDAQ:PZZA) is more popular among hedge funds. Our overall hedge fund sentiment score for PZZA is 90. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Unfortunately PZZA wasn't nearly as popular as these 10 stocks and hedge funds that were betting on PZZA were disappointed as the stock returned -3.3% since the end of the second quarter (through 10/30) 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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