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Do Hedge Funds Love Jack in the Box Inc. (JACK)?

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 Jack in the Box Inc. (NASDAQ:JACK) and determine whether hedge funds had an edge regarding this stock.

Is Jack in the Box Inc. (NASDAQ:JACK) a buy, sell, or hold? The best stock pickers were getting more bullish. The number of long hedge fund positions moved up by 3 lately. Jack in the Box Inc. (NASDAQ:JACK) was in 31 hedge funds’ portfolios at the end of June. The all time high for this statistics is 36. Our calculations also showed that JACK isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 28 hedge funds in our database with JACK holdings at the end of March.

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.

Greenlight Capital

David Einhorn of Greenlight Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind let’s check out the new hedge fund action encompassing Jack in the Box Inc. (NASDAQ:JACK).

What have hedge funds been doing with Jack in the Box Inc. (NASDAQ:JACK)?

Heading into the third quarter of 2020, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in JACK over the last 20 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Among these funds, Citadel Investment Group held the most valuable stake in Jack in the Box Inc. (NASDAQ:JACK), which was worth $52.4 million at the end of the third quarter. On the second spot was Holocene Advisors which amassed $35.7 million worth of shares. Engaged Capital, AQR Capital Management, and Moore Global Investments 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 MIK Capital allocated the biggest weight to Jack in the Box Inc. (NASDAQ:JACK), around 8.4% of its 13F portfolio. Engaged Capital is also relatively very bullish on the stock, earmarking 2.82 percent of its 13F equity portfolio to JACK.

As industrywide interest jumped, key hedge funds have been driving this bullishness. Engaged Capital, managed by Glenn W. Welling, established the largest position in Jack in the Box Inc. (NASDAQ:JACK). Engaged Capital had $26.2 million invested in the company at the end of the quarter. Louis Bacon’s Moore Global Investments also initiated a $19.4 million position during the quarter. The following funds were also among the new JACK investors: David Einhorn’s Greenlight Capital, Steven Boyd’s Armistice Capital, and Andrew Kurita’s Kettle Hill Capital Management.

Let’s now review hedge fund activity in other stocks similar to Jack in the Box Inc. (NASDAQ:JACK). These stocks are Adverum Biotechnologies, Inc. (NASDAQ:ADVM), American Assets Trust, Inc (NYSE:AAT), BEST Inc. (NYSE:BEST), Flagstar Bancorp Inc (NYSE:FBC), Yelp Inc (NYSE:YELP), Upwork Inc. (NASDAQ:UPWK), and Verra Mobility Corporation (NASDAQ:VRRM). This group of stocks’ market caps are closest to JACK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ADVM 25 702737 0
AAT 20 34529 5
BEST 6 18518 0
FBC 15 105503 0
YELP 27 381420 2
UPWK 25 236015 3
VRRM 25 247110 2
Average 20.4 246547 1.7

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.4 hedge funds with bullish positions and the average amount invested in these stocks was $247 million. That figure was $292 million in JACK’s case. Yelp Inc (NYSE:YELP) is the most popular stock in this table. On the other hand BEST Inc. (NYSE:BEST) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Jack in the Box Inc. (NASDAQ:JACK) is more popular among hedge funds. Our overall hedge fund sentiment score for JACK is 83.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23.8% in 2020 through September 14th but still managed to beat the market by 17.6 percentage points. Hedge funds were also right about betting on JACK as the stock returned 15.3% since the end of June 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.