What Hedge Funds Thought Of These Q3 IPOs

The July-to-September period was a weak one in the U.S equity markets in terms of initial public offerings, with only 34 companies going public. This denotes a decrease of 43% relative to the same period of last year. Even more to that, the average IPO return in the three-month period was negative for the first time since 2011, delivering an average loss of 4%. A high number of planned IPOs were pulled or delayed because of the turbulent market conditions or acquisitions, according to Renaissance Capital. The following article will lay out a list of the five most favored IPOs by the investors monitored by Insider Monkey. Specifically, this article will discuss the smart money sentiment on each stock and the performance of the companies in question since their IPOs.

We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 102% since then and outperformed the S&P 500 Index by around 53 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.

#5 Seritage Growth Properties (NYSE:SRG)

-Investors with Long Positions (as of September 30): 23

-Aggregate Value of Investors’ Holdings (as of September 30): $470.02 Million

Seritage Growth Properties (NYSE:SRG) was among the most favored third-quarter IPOs of smart money, with 23 investors tracked by our team having positions in the company at the end of the quarter. These investors had accumulated 38.20% of the company’s outstanding common stock as of September 30. On July 2, the self-managed real estate investment trust (REIT) completed a rights offering to Sears Holdings Corp (NASDAQ:SHLD) stockholders to purchase common shares of the REIT in order to fund the acquisition of Sears’ 235 stores and its 50% interests in three joint ventures with three mall operators. The majority of the space was leased back to Sears Holdings, while the remaining 11 properties were leased to third-party tenants. The shares of the REIT are down by nearly 4% since July 6, when they were first listed on the NYSE. Ken Griffin’s Citadel Advisors LLC was among the largest equity holders of Seritage Growth Properties (NYSE:SRG) at the end of September, holding 1.78 million shares.

#4 Blue Buffalo Pet Products Inc. (NASDAQ:BUFF)

-Investors with Long Positions (as of September 30): 24

-Aggregate Value of Investors’ Holdings (as of September 30): $153.78 Million

24 hedge funds tracked by Insider Monkey were invested in Blue Buffalo Pet Products Inc. (NASDAQ:BUFF) at the end of the third quarter, amassing a mere 4.40% of the company’s outstanding shares. The shares of the pet food company, which completed its initial public offering on July 27, are currently trading below its IPO price of $20.00 per share. The company’s stockholders sold 38.91 million shares of common stock during the IPO, including 5.07 million shares pursuant to the exercise of stock options. Blue Buffalo Pet Products reported third-quarter net income of $27.1 million on net sales of $259.4 million, compared with net income of $27.7 million on net sales of $234.8 million reported for the same year-ago period. The decrease in net income was mainly attributable to increased expenses related to the IPO. Joel Greenblatt’s Gotham Asset Management holds a 708,152-share position in Blue Buffalo Pet Products Inc. (NASDAQ:BUFF) as of September 30.

#3 SPX Flow Inc. (NYSE:FLOW)

-Investors with Long Positions (as of September 30): 24

-Aggregate Value of Investors’ Holdings (as of September 30): $172.31 million

SPX Flow Inc. (NYSE:FLOW) was owned by SPX Corporation (NYSE:SPXC) until September 26, when the latter distributed SPX Flow’s outstanding common stock to the shareholders of SPX Corporation via a spin-off transaction in an attempt to narrow the focus of the company. SPX Flow operates as a global supplier of highly-specialized, engineered solutions, mainly operating in three segments: Food and Beverage, Power and Energy, and Industrial. 24 hedge funds within our database had stakes in SPX Flow at the end of the September quarter, stockpiling 12.20% of its outstanding common stock. Meanwhile, the stock is nearly 3% in the red since the spin-off, mainly owing to the low oil-price environment, the strong U.S dollar, and the slowing global economy. Steve Cohen’s Point72 Asset Management owns 915,200 shares of SPX Flow Inc. (NYSE:FLOW) as of September 30.

#2 Kraft Heinz Co (NASDAQ:KHC)

-Investors with Long Positions (as of September 30): 56

-Aggregate Value of Investors’ Holdings (as of September 30): $25.99 Billion

Earlier this year, Warren Buffett’s Berkshire Hathaway and 3G Capital teamed up to create a food behemoth by merging H.J. Heinz Co. and The Kraft Foods Group. In July, the third-largest food and beverage company kicked off trading on the NASDAQ Stock Market, after successfully completing the merger. A total of 56 hedge fund firms were invested in the company at the end of the third quarter, and they collectively owned 30.40% of the company’s shares at that time. Some market participants and analysts are concerned that the freshly-created giant will have a hard time improving its top-line, as some of its brands have been struggling in recent years. Even so, Kraft Heinz anticipates generating around $1.5 billion in annual cost synergies, which could eventually be used to expand those struggling brands into new markets. Warren Buffett holds a 325.63 million-share stake in Kraft Heinz Co (NASDAQ:KHC) as of September 30.

#1 Paypal Holdings Inc. (NASDAQ:PYPL)

-Investors with Long Positions (as of September 30): 87

-Aggregate Value of Investors’ Holdings (as of September 30): $4.94 Billion

On July 17, Paypal Holdings Inc. (NASDAQ:PYPL) became an independent publicly-traded company via the pro rata distribution by eBay Inc. (NASDAQ:EBAY) of all PayPal’s outstanding stock to eBay shareholders. Clearly, the technology platform company that enables digital payments has received strong investor interest following the aforementioned spin-off. It is widely known that mobile devices are used more frequently for e-commerce payments, which propelled PayPal to acquire Paydiant in April for $230 million in an all-cash deal. PayPal’s ability to differentiate its business and accurately identify the trends within its industry will allow the digital payment company to maintain its leading position. The number of smart money investors with positions in PayPal at the end of the latest quarter stood at 87, accumulating 13.10% of its outstanding common stock. Carl Icahn of Icahn Capital LP owned 46.27 million shares of Paypal Holdings Inc. (NASDAQ:PYPL) at the end of September.

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