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Did Hedge Funds Make The Right Call On Freshpet Inc (FRPT) ?

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 Freshpet Inc (NASDAQ:FRPT) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Freshpet Inc (NASDAQ:FRPT) has experienced an increase in support from the world’s most elite money managers in recent months. FRPT was in 24 hedge funds’ portfolios at the end of the first quarter of 2020. There were 20 hedge funds in our database with FRPT positions at the end of the previous quarter. Our calculations also showed that FRPT 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.

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 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 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.

TUDOR INVESTMENT CORP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. 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 if you have any good ideas send us an email. With all of this in mind let’s take a peek at the fresh hedge fund action surrounding Freshpet Inc (NASDAQ:FRPT).

What does smart money think about Freshpet Inc (NASDAQ:FRPT)?

Heading into the second quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in FRPT a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is FRPT A Good Stock To Buy?

Among these funds, Rock Springs Capital Management held the most valuable stake in Freshpet Inc (NASDAQ:FRPT), which was worth $25.4 million at the end of the third quarter. On the second spot was Driehaus Capital which amassed $22.7 million worth of shares. D E Shaw, Citadel Investment Group, and Fisher Asset 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 Pinz Capital allocated the biggest weight to Freshpet Inc (NASDAQ:FRPT), around 5.66% of its 13F portfolio. Manatuck Hill Partners is also relatively very bullish on the stock, earmarking 5.54 percent of its 13F equity portfolio to FRPT.

As industrywide interest jumped, some big names were leading the bulls’ herd. Pinz Capital, managed by Matthew L Pinz, initiated the most valuable position in Freshpet Inc (NASDAQ:FRPT). Pinz Capital had $2.2 million invested in the company at the end of the quarter. Peter Algert and Kevin Coldiron’s Algert Coldiron Investors also made a $1.7 million investment in the stock during the quarter. The following funds were also among the new FRPT investors: Paul Tudor Jones’s Tudor Investment Corp, Minhua Zhang’s Weld Capital Management, and Mika Toikka’s AlphaCrest Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Freshpet Inc (NASDAQ:FRPT) but similarly valued. We will take a look at Taubman Centers, Inc. (NYSE:TCO), Gildan Activewear Inc (NYSE:GIL), Brighthouse Financial, Inc. (NASDAQ:BHF), and Qurate Retail, Inc. (NASDAQ:QRTEA). All of these stocks’ market caps resemble FRPT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TCO 38 478517 12
GIL 22 274827 0
BHF 25 372976 -18
QRTEA 32 477820 -7
Average 29.25 401035 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $401 million. That figure was $141 million in FRPT’s case. Taubman Centers, Inc. (NYSE:TCO) is the most popular stock in this table. On the other hand Gildan Activewear Inc (NYSE:GIL) is the least popular one with only 22 bullish hedge fund positions. Freshpet Inc (NASDAQ:FRPT) is not the least popular stock in this group but hedge fund interest is still below average. 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 and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on FRPT as the stock returned 31% during the second quarter and outperformed the market by an even larger margin.

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