Did Hedge Funds Make The Right Call On Papa John’s International, Inc. (PZZA) ?

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 Papa John’s International, Inc. (NASDAQ:PZZA) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Papa John’s International, Inc. (NASDAQ:PZZA) has seen an increase in support from the world’s most elite money managers of late. Our calculations also showed that PZZA 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 was 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’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.

Och-Ziff Capital Management

Daniel Och, Founder of OZ Management

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. Now let’s take a glance at the fresh hedge fund action regarding Papa John’s International, Inc. (NASDAQ:PZZA).

How are hedge funds trading Papa John’s International, Inc. (NASDAQ:PZZA)?

Heading into the second quarter of 2020, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 4% from the previous quarter. By comparison, 22 hedge funds held shares or bullish call options in PZZA a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is PZZA A Good Stock To Buy?

Among these funds, Dorsal Capital Management held the most valuable stake in Papa John’s International, Inc. (NASDAQ:PZZA), which was worth $48 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $44.8 million worth of shares. Citadel Investment Group, Bares Capital Management, and Driehaus Capital 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 13D Management allocated the biggest weight to Papa John’s International, Inc. (NASDAQ:PZZA), around 5.18% of its 13F portfolio. Dorsal Capital Management is also relatively very bullish on the stock, dishing out 3.89 percent of its 13F equity portfolio to PZZA.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Sabrepoint Capital, managed by George Baxter, assembled the most valuable position in Papa John’s International, Inc. (NASDAQ:PZZA). Sabrepoint Capital had $8 million invested in the company at the end of the quarter. Nick Thakore’s Diametric Capital also made a $3 million investment in the stock during the quarter. The other funds with new positions in the stock are Steve Cohen’s Point72 Asset Management, Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management, and Donald Sussman’s Paloma Partners.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Papa John’s International, Inc. (NASDAQ:PZZA) but similarly valued. These stocks are Merit Medical Systems, Inc. (NASDAQ:MMSI), IGM Biosciences, Inc. (NASDAQ:IGMS), Afya Limited (NASDAQ:AFYA), and TeleTech Holdings, Inc. (NASDAQ:TTEC). This group of stocks’ market valuations match PZZA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MMSI 11 195740 -6
IGMS 14 517563 2
AFYA 8 54892 -1
TTEC 15 36684 -11
Average 12 201220 -4

View table here if you experience formatting issues.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $201 million. That figure was $251 million in PZZA’s case. TeleTech Holdings, Inc. (NASDAQ:TTEC) is the most popular stock in this table. On the other hand Afya Limited (NASDAQ:AFYA) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Papa John’s International, Inc. (NASDAQ:PZZA) 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on PZZA as the stock returned 49.2% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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