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Do Hedge Funds Love Shake Shack Inc (SHAK)?

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Shake Shack Inc (NYSE:SHAK) based on those filings.

Shake Shack Inc (NYSE:SHAK) investors should pay attention to a decrease in hedge fund sentiment of late. Our calculations also showed that SHAK 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.

Chris Hansen - Valiant Capital

Chris Hansen of Valiant Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s go over the new hedge fund action surrounding Shake Shack Inc (NYSE:SHAK).

How are hedge funds trading Shake Shack Inc (NYSE:SHAK)?

Heading into the second quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -12% from the previous quarter. On the other hand, there were a total of 19 hedge funds with a bullish position in SHAK a year ago. With hedge funds’ capital changing hands, there exists a few key hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Select Equity Group, managed by Robert Joseph Caruso, holds the number one position in Shake Shack Inc (NYSE:SHAK). Select Equity Group has a $109.2 million position in the stock, comprising 0.8% of its 13F portfolio. Coming in second is Joel Ramin of 12 West Capital Management, with a $105.8 million position; the fund has 6.3% of its 13F portfolio invested in the stock. Remaining members of the smart money that hold long positions include Ricky Sandler’s Eminence Capital, Nancy Zevenbergen’s Zevenbergen Capital Investments and Anand Desai’s Darsana Capital Partners. In terms of the portfolio weights assigned to each position 12 West Capital Management allocated the biggest weight to Shake Shack Inc (NYSE:SHAK), around 6.3% of its 13F portfolio. Bandera Partners is also relatively very bullish on the stock, designating 2.86 percent of its 13F equity portfolio to SHAK.

Since Shake Shack Inc (NYSE:SHAK) has witnessed declining sentiment from the aggregate hedge fund industry, it’s easy to see that there exists a select few hedgies who sold off their positions entirely heading into Q4. At the top of the heap, Renaissance Technologies cut the largest investment of the 750 funds monitored by Insider Monkey, comprising an estimated $29.6 million in stock. Brad Farber’s fund, Atika Capital, also dropped its stock, about $5.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 3 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Shake Shack Inc (NYSE:SHAK) but similarly valued. We will take a look at Adtalem Global Education Inc. (NYSE:ATGE), 8×8, Inc. (NYSE:EGHT), NBT Bancorp Inc. (NASDAQ:NBTB), and Domtar Corporation (NYSE:UFS). This group of stocks’ market valuations resemble SHAK’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ATGE 12 268581 -8
EGHT 20 368670 6
NBTB 4 10462 -3
UFS 18 86572 -8
Average 13.5 183571 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $184 million. That figure was $394 million in SHAK’s case. 8×8, Inc. (NYSE:EGHT) is the most popular stock in this table. On the other hand NBT Bancorp Inc. (NASDAQ:NBTB) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Shake Shack Inc (NYSE:SHAK) 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 13.9% in 2020 through June 10th but still managed to beat the market by 14.2 percentage points. Hedge funds were also right about betting on SHAK as the stock returned 51.5% so far in Q2 (through June 10th) 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.