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Did Hedge Funds Make The Right Call On Aramark (ARMK) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Aramark (NYSE:ARMK) and determine whether hedge funds had an edge regarding this stock.

Aramark (NYSE:ARMK) has seen a decrease in activity from the world’s largest hedge funds of late. ARMK was in 29 hedge funds’ portfolios at the end of March. There were 36 hedge funds in our database with ARMK positions at the end of the previous quarter. Our calculations also showed that ARMK isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 S&P 500 ETFs by more than 58 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Daniel Sundheim D1 Capital

Daniel Sundheim of D1 Capital Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Now let’s take a peek at the new hedge fund action surrounding Aramark (NYSE:ARMK).

Hedge fund activity in Aramark (NYSE:ARMK)

Heading into the second quarter of 2020, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 38 hedge funds with a bullish position in ARMK a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ARMK A Good Stock To Buy?

The largest stake in Aramark (NYSE:ARMK) was held by Kensico Capital, which reported holding $140.5 million worth of stock at the end of September. It was followed by Permian Investment Partners with a $83.3 million position. Other investors bullish on the company included Brahman Capital, Eminence Capital, and Mantle Ridge LP. In terms of the portfolio weights assigned to each position Mantle Ridge LP allocated the biggest weight to Aramark (NYSE:ARMK), around 100% of its 13F portfolio. Permian Investment Partners is also relatively very bullish on the stock, setting aside 19.87 percent of its 13F equity portfolio to ARMK.

Judging by the fact that Aramark (NYSE:ARMK) has witnessed bearish sentiment from hedge fund managers, it’s easy to see that there were a few money managers that slashed their entire stakes in the first quarter. It’s worth mentioning that Daniel Sundheim’s D1 Capital Partners said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, valued at an estimated $156.2 million in stock, and Seth Rosen’s Nitorum Capital was right behind this move, as the fund dropped about $74.9 million worth. These moves are interesting, as total hedge fund interest dropped by 7 funds in the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Aramark (NYSE:ARMK). These stocks are Companhia de Saneamento Basico (NYSE:SBS), BorgWarner Inc. (NYSE:BWA), Canopy Growth Corporation (NYSE:CGC), and Wayfair Inc (NYSE:W). This group of stocks’ market valuations resemble ARMK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SBS 8 218391 -4
BWA 30 482313 3
CGC 10 30232 -4
W 34 1043243 1
Average 20.5 443545 -1

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $444 million. That figure was $596 million in ARMK’s case. Wayfair Inc (NYSE:W) is the most popular stock in this table. On the other hand Companhia de Saneamento Basico (NYSE:SBS) 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. 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 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately ARMK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ARMK were disappointed as the stock returned 13.5% during the same time period 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 many of these stocks already outperformed the market so far this year.

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