Did Hedge Funds Make The Right Call On Cal-Maine Foods Inc (CALM) ?

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). 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 Cal-Maine Foods Inc (NASDAQ:CALM) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Cal-Maine Foods Inc (NASDAQ:CALM) investors should be aware of an increase in hedge fund sentiment in recent months. CALM was in 26 hedge funds’ portfolios at the end of March. There were 15 hedge funds in our database with CALM positions at the end of the previous quarter. Our calculations also showed that CALM 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.

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Martin Whitman Third Avenue Management Marty Whitman

Martin Whitman of Third Avenue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind let’s go over the new hedge fund action regarding Cal-Maine Foods Inc (NASDAQ:CALM).

How have hedgies been trading Cal-Maine Foods Inc (NASDAQ:CALM)?

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of 73% from the fourth quarter of 2019. On the other hand, there were a total of 16 hedge funds with a bullish position in CALM a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, Diamond Hill Capital was the largest shareholder of Cal-Maine Foods Inc (NASDAQ:CALM), with a stake worth $90.9 million reported as of the end of September. Trailing Diamond Hill Capital was Renaissance Technologies, which amassed a stake valued at $43.8 million. Highline Capital Management, Point72 Asset Management, and Citadel Investment Group 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 Highline Capital Management allocated the biggest weight to Cal-Maine Foods Inc (NASDAQ:CALM), around 4.85% of its 13F portfolio. Third Avenue Management is also relatively very bullish on the stock, designating 0.89 percent of its 13F equity portfolio to CALM.

Consequently, some big names have been driving this bullishness. Highline Capital Management, managed by Jacob Doft, initiated the most valuable position in Cal-Maine Foods Inc (NASDAQ:CALM). Highline Capital Management had $19.9 million invested in the company at the end of the quarter. Martin Whitman’s Third Avenue Management also made a $6 million investment in the stock during the quarter. The other funds with new positions in the stock are Dmitry Balyasny’s Balyasny Asset Management, Israel Englander’s Millennium Management, and George McCabe’s Portolan Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Cal-Maine Foods Inc (NASDAQ:CALM) but similarly valued. We will take a look at PacWest Bancorp (NASDAQ:PACW), Element Solutions Inc. (NYSE:ESI), PotlatchDeltic Corporation (NASDAQ:PCH), and John Wiley & Sons Inc (NYSE:JW). This group of stocks’ market valuations are closest to CALM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PACW 23 121550 -8
ESI 35 387209 -2
PCH 16 234507 0
JW 17 55212 -4
Average 22.75 199620 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $200 million. That figure was $219 million in CALM’s case. Element Solutions Inc. (NYSE:ESI) is the most popular stock in this table. On the other hand PotlatchDeltic Corporation (NASDAQ:PCH) is the least popular one with only 16 bullish hedge fund positions. Cal-Maine Foods Inc (NASDAQ:CALM) 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 CALM wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on CALM were disappointed as the stock returned 1.1% 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.