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Aramark (ARMK) vs. Top 20 Hedge Fund Stocks in 2019

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves. In this article, we look at what those funds think of Aramark (NYSE:ARMK) based on that data.

Is Aramark (NYSE:ARMK) a marvelous investment today? The smart money is becoming less confident. The number of bullish hedge fund bets fell by 1 lately. Our calculations also showed that ARMK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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.

Michael Lowenstein Kensico Capital

Michael Lowenstein of Kensico Capital

We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let’s take a look at the recent hedge fund action regarding Aramark (NYSE:ARMK).

What have hedge funds been doing with Aramark (NYSE:ARMK)?

At the end of the third quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ARMK over the last 17 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Michael Lowenstein’s Kensico Capital has the most valuable position in Aramark (NYSE:ARMK), worth close to $349.1 million, amounting to 6.7% of its total 13F portfolio. On Kensico Capital’s heels is ExodusPoint Capital, led by Michael Gelband, holding a $152.6 million position; 5.3% of its 13F portfolio is allocated to the company. Other members of the smart money that are bullish contain Daniel Sundheim’s D1 Capital Partners, Seth Rosen’s Nitorum Capital and Paul Hilal’s Mantle Ridge LP. In terms of the portfolio weights assigned to each position Lionstone Capital Management allocated the biggest weight to Aramark (NYSE:ARMK), around 8.88% of its 13F portfolio. Kensico Capital is also relatively very bullish on the stock, designating 6.68 percent of its 13F equity portfolio to ARMK.

Since Aramark (NYSE:ARMK) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedgies who sold off their full holdings in the third quarter. At the top of the heap, Robert Boucai’s Newbrook Capital Advisors said goodbye to the biggest position of the “upper crust” of funds followed by Insider Monkey, valued at an estimated $33.3 million in call options. Israel Englander’s fund, Millennium Management, also dumped its call options, about $17.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds in the third quarter.

Let’s also examine hedge fund activity in other stocks similar to Aramark (NYSE:ARMK). We will take a look at Camden Property Trust (NYSE:CPT), Noble Energy, Inc. (NYSE:NBL), CF Industries Holdings, Inc. (NYSE:CF), and Sasol Limited (NYSE:SSL). This group of stocks’ market caps resemble ARMK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CPT 20 316246 1
NBL 28 602859 3
CF 39 956283 4
SSL 8 26026 0
Average 23.75 475354 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $475 million. That figure was $1297 million in ARMK’s case. CF Industries Holdings, Inc. (NYSE:CF) is the most popular stock in this table. On the other hand Sasol Limited (NYSE:SSL) is the least popular one with only 8 bullish hedge fund positions. Aramark (NYSE:ARMK) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on ARMK as the stock returned 52.1% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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