It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Yum! Brands, Inc. (NYSE:YUM).
Is Yum! Brands, Inc. (NYSE:YUM) a buy here? The best stock pickers are turning bullish. The number of long hedge fund positions moved up by 5 in recent months. Our calculations also showed that YUM isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). YUM was in 35 hedge funds' portfolios at the end of the third quarter of 2019. There were 30 hedge funds in our database with YUM holdings at the end of the previous quarter. 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 has shown that hedge funds' small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
[caption id="attachment_673876" align="aligncenter" width="1613"] John Overdeck of Two Sigma Advisors[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to go over the latest hedge fund action encompassing Yum! Brands, Inc. (NYSE:YUM).
What have hedge funds been doing with Yum! Brands, Inc. (NYSE:YUM)?
Heading into the fourth quarter of 2019, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in YUM over the last 17 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).
The largest stake in Yum! Brands, Inc. (NYSE:YUM) was held by Two Sigma Advisors, which reported holding $182.3 million worth of stock at the end of September. It was followed by D E Shaw with a $102.3 million position. Other investors bullish on the company included Alkeon Capital Management, Arrowstreet Capital, and Marshall Wace. In terms of the portfolio weights assigned to each position Cognios Capital allocated the biggest weight to Yum! Brands, Inc. (NYSE:YUM), around 0.82% of its portfolio. Winton Capital Management is also relatively very bullish on the stock, designating 0.73 percent of its 13F equity portfolio to YUM.
With a general bullishness amongst the heavyweights, key hedge funds were leading the bulls' herd. Laurion Capital Management, managed by Benjamin A. Smith, established the biggest position in Yum! Brands, Inc. (NYSE:YUM). Laurion Capital Management had $14.9 million invested in the company at the end of the quarter. Gabriel Plotkin's Melvin Capital Management also initiated a $11.3 million position during the quarter. The other funds with new positions in the stock are Parvinder Thiara's Athanor Capital, Matthew Iorio's White Elm Capital, and Jeffrey Talpins's Element Capital Management.
Let's check out hedge fund activity in other stocks similar to Yum! Brands, Inc. (NYSE:YUM). We will take a look at Energy Transfer L.P. (NYSE:ET), The Kraft Heinz Company (NASDAQ:KHC), NetEase, Inc (NASDAQ:NTES), and Xcel Energy Inc (NASDAQ:XEL). All of these stocks' market caps match YUM's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ET,30,623109,1 KHC,36,9572927,2 NTES,30,3513002,-4 XEL,17,573407,-1 Average,28.25,3570611,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $3571 million. That figure was $842 million in YUM's case. The Kraft Heinz Company (NASDAQ:KHC) is the most popular stock in this table. On the other hand Xcel Energy Inc (NASDAQ:XEL) is the least popular one with only 17 bullish hedge fund positions. Yum! Brands, Inc. (NYSE:YUM) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately YUM wasn't nearly as popular as these 20 stocks and hedge funds that were betting on YUM were disappointed as the stock returned -10.9% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.