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Did Hedge Funds Make The Right Call On US Foods Holding Corp. (USFD) ?

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 US Foods Holding Corp. (NYSE:USFD) and determine whether hedge funds had an edge regarding this stock.

US Foods Holding Corp. (NYSE:USFD) shareholders have witnessed a decrease in support from the world’s most elite money managers of late. Our calculations also showed that USFD 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Scott Ferguson Sachem Head Capital

Scott Ferguson of Sachem Head 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 analyze the new hedge fund action encompassing US Foods Holding Corp. (NYSE:USFD).

How have hedgies been trading US Foods Holding Corp. (NYSE:USFD)?

Heading into the second quarter of 2020, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards USFD over the last 18 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Among these funds, Eminence Capital held the most valuable stake in US Foods Holding Corp. (NYSE:USFD), which was worth $192.8 million at the end of the third quarter. On the second spot was D E Shaw which amassed $56.4 million worth of shares. Sachem Head Capital, Two Sigma Advisors, and Polar 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 Sonic Capital allocated the biggest weight to US Foods Holding Corp. (NYSE:USFD), around 7.67% of its 13F portfolio. Sachem Head Capital is also relatively very bullish on the stock, setting aside 4.13 percent of its 13F equity portfolio to USFD.

Due to the fact that US Foods Holding Corp. (NYSE:USFD) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of hedgies who were dropping their full holdings by the end of the first quarter. Intriguingly, Robert Pohly’s Samlyn Capital dropped the largest stake of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $46.3 million in stock. Jack Woodruff’s fund, Candlestick Capital Management, also said goodbye to its stock, about $43.2 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 4 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as US Foods Holding Corp. (NYSE:USFD) but similarly valued. These stocks are Equity Commonwealth (NYSE:EQC), Cogent Communications Holdings Inc. (NASDAQ:CCOI), Tetra Tech, Inc. (NASDAQ:TTEK), and Plains All American Pipeline, L.P. (NYSE:PAA). This group of stocks’ market caps resemble USFD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EQC 20 176264 -2
CCOI 27 454195 3
TTEK 21 115608 -2
PAA 8 44850 -4
Average 19 197729 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 19 hedge funds with bullish positions and the average amount invested in these stocks was $198 million. That figure was $507 million in USFD’s case. Cogent Communications Holdings Inc. (NASDAQ:CCOI) is the most popular stock in this table. On the other hand Plains All American Pipeline, L.P. (NYSE:PAA) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks US Foods Holding Corp. (NYSE:USFD) 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 USFD wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on USFD were disappointed as the stock returned 11.3% 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.