Did Hedge Funds Make The Right Call On Hostess Brands, Inc. (TWNK) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtHostess Brands, Inc. (NASDAQ:TWNK) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Is Hostess Brands, Inc. (NASDAQ:TWNK) the right investment to pursue these days? Prominent investors were getting less bullish. The number of long hedge fund positions decreased by 7 recently. Our calculations also showed that TWNK 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.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

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. Now let’s take a look at the latest hedge fund action encompassing Hostess Brands, Inc. (NASDAQ:TWNK).

What have hedge funds been doing with Hostess Brands, Inc. (NASDAQ:TWNK)?

Heading into the second quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from one quarter earlier. On the other hand, there were a total of 24 hedge funds with a bullish position in TWNK a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

The largest stake in Hostess Brands, Inc. (NASDAQ:TWNK) was held by Cardinal Capital, which reported holding $68.1 million worth of stock at the end of September. It was followed by Millennium Management with a $10.8 million position. Other investors bullish on the company included Armistice Capital, Renaissance Technologies, and D E Shaw. In terms of the portfolio weights assigned to each position Cardinal Capital allocated the biggest weight to Hostess Brands, Inc. (NASDAQ:TWNK), around 3.35% of its 13F portfolio. Fort Baker Capital Management is also relatively very bullish on the stock, earmarking 2.84 percent of its 13F equity portfolio to TWNK.

Seeing as Hostess Brands, Inc. (NASDAQ:TWNK) has experienced falling interest from the entirety of the hedge funds we track, we can see that there is a sect of funds who sold off their entire stakes heading into Q4. Interestingly, Brian Scudieri’s Kehrs Ridge Capital sold off the largest position of all the hedgies followed by Insider Monkey, totaling close to $3.5 million in stock. Philippe Laffont’s fund, Coatue Management, also dropped its stock, about $2.8 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 7 funds heading into Q4.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Hostess Brands, Inc. (NASDAQ:TWNK) but similarly valued. These stocks are Zymeworks Inc. (NYSE:ZYME), Gibraltar Industries Inc (NASDAQ:ROCK), Cimpress plc (NASDAQ:CMPR), and Ryder System, Inc. (NYSE:R). This group of stocks’ market valuations resemble TWNK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ZYME 27 654899 3
ROCK 19 103608 -4
CMPR 19 269535 1
R 18 157531 -5
Average 20.75 296393 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $296 million. That figure was $166 million in TWNK’s case. Zymeworks Inc. (NYSE:ZYME) is the most popular stock in this table. On the other hand Ryder System, Inc. (NYSE:R) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Hostess Brands, Inc. (NASDAQ:TWNK) is more popular among hedge funds. 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. Unfortunately TWNK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TWNK were disappointed as the stock returned 14.6% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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