At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Hormel Foods Corporation (NYSE:HRL) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Hormel Foods Corporation (NYSE:HRL) was in 27 hedge funds' portfolios at the end of June. The all time high for this statistics is 29. HRL investors should pay attention to a decrease in enthusiasm from smart money recently. There were 28 hedge funds in our database with HRL positions at the end of the first quarter. Our calculations also showed that HRL 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.
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. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 review the latest hedge fund action regarding Hormel Foods Corporation (NYSE:HRL).
What have hedge funds been doing with Hormel Foods Corporation (NYSE:HRL)?
At Q2's end, a total of 27 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HRL over the last 20 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
Among these funds, AQR Capital Management held the most valuable stake in Hormel Foods Corporation (NYSE:HRL), which was worth $173.9 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $133 million worth of shares. Citadel Investment Group, Two Sigma Advisors, and Adage Capital Management 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 Fairpointe Capital allocated the biggest weight to Hormel Foods Corporation (NYSE:HRL), around 2.05% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, dishing out 0.83 percent of its 13F equity portfolio to HRL.
Since Hormel Foods Corporation (NYSE:HRL) has faced a decline in interest from hedge fund managers, it's safe to say that there lies a certain "tier" of funds who were dropping their full holdings heading into Q3. Interestingly, Dmitry Balyasny's Balyasny Asset Management said goodbye to the biggest stake of the 750 funds monitored by Insider Monkey, valued at close to $10.4 million in stock. Anand Parekh's fund, Alyeska Investment Group, also dropped its stock, about $4.3 million worth. These moves are interesting, as total hedge fund interest was cut by 1 funds heading into Q3.
Let's also examine hedge fund activity in other stocks similar to Hormel Foods Corporation (NYSE:HRL). These stocks are PACCAR Inc (NASDAQ:PCAR), AFLAC Incorporated (NYSE:AFL), Suncor Energy Inc. (NYSE:SU), Sirius XM Holdings Inc (NASDAQ:SIRI), Cummins Inc. (NYSE:CMI), Schlumberger Limited. (NYSE:SLB), and Johnson Controls International plc (NYSE:JCI). All of these stocks' market caps resemble HRL's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PCAR,30,244385,-8 AFL,34,588093,2 SU,29,845050,-1 SIRI,42,1136784,6 CMI,38,358670,4 SLB,53,932470,4 JCI,28,1099174,-9 Average,36.3,743518,-0.3 [/table]
As you can see these stocks had an average of 36.3 hedge funds with bullish positions and the average amount invested in these stocks was $744 million. That figure was $441 million in HRL's case. Schlumberger Limited. (NYSE:SLB) is the most popular stock in this table. On the other hand Johnson Controls International plc (NYSE:JCI) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks Hormel Foods Corporation (NYSE:HRL) is even less popular than JCI. Our overall hedge fund sentiment score for HRL is 29.9. 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. Hedge funds dodged a bullet by taking a bearish stance towards HRL. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 21.3% in 2020 through September 25th but managed to beat the market by 17.7 percentage points. Unfortunately HRL wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); HRL investors were disappointed as the stock returned 1.7% since the end of Q2 (through 9/25) 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 so far in 2020.
