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Good Time To Buy SYSCO Corporation (SYY) After Court Rules Against US Foods Merger?

A preliminary injunction blocking SYSCO Corporation (NYSE:SYY)‘s planned acquisition of US Foods Inc. was issued by a US court on Tuesday. The decision goes in favor of the Federal Trade Commission (FTC), which filed a lawsuit against the possible merger of the country’s two largest food distributors. SYSCO and US Foods control 75% of the food distribution market in the country. The FTC sued the $3.5 billion acquisition of US Foods by SYSCO on the grounds that the merger could create a monopoly in the industry, and would lead to high prices and bad service. Judge Amit Mehta, in his brief opinion, said that the FTC has shown that there is a reasonable probability that the merger of US Foods and SYSCO would damage competition in the market. SYSCO Corporation (NYSE:SYY)’s shares plummeted by over 3% after the ruling. In the past 52 weeks, SYSCO shares are essentially flat; the company recorded a one-year high in January when it touched $41.45 share price. SYSCO’s profit margins have been low, but its cash flows, revenue, and valuations levels are its strengths, which in the case of its cash flow, it is trying to use to stimulate growth.

US Foods

Apart from the recent court ruling and its effects on SYSCO Corporation (NYSE:SYY)’s stock, we must also take into account the hedge funds’ positions in the food company. By the end of the first quarter of 2015, 37 of the hedge funds we track at Insider Monkey had long positions in SYSCO, whereas in the previous quarter, there were only 24 hedge funds having positions in the company. This is a 54% increase in the number of bullish hedge funds in SYSCO, which is a positive sign and we can say that the hedge funds sentiment is positive.

We at Insider Monkey pay keen attention to hedge funds’ positions because the funds spend a lot of time, effort, and resources so as to wisely invest in different companies. Our experts analyzed the historical stock picks of small-cap companies like SYSCO by hedge funds, and found out that the funds performed far better betting on these companies than they did on large-cap stocks, which is where most of their money is invested and why their performances as a whole has been poor for years. A portfolio of the 15 most popular small-cap stocks among funds outperformed the S&P 500 Total Return Index by 95 basis points per month between 1999 and 2012, in backtesting. The exceptional results of this strategy got even better in forward testing after the strategy went live at the end of August 2012, returning more than 142% and beating the market by more than 83 percentage points since then, and by 4.6 percentage points in the first quarter of this year (see more details).

Insider transactions and hedge funds’ activity are the most important metrics which can help investors while making decisions about a company. Some investors overlook hedge funds because of the poor performance of funds in recent years, but our research proves that these poor results by hedge funds were because of reasons which have nothing to do with their stock picking ability. Hedge funds have underperformed the market for several reasons which don’t have anything to do with stock picking at all, but rather with the composition of their investments and the high fees they chard to clients. Insider activity  is just as important metric, as research studies have proven the efficacy of piggybacking insider purchases. However, there were no insider transactions recorded for SYSCO in 2015.

Let’s have a detailed look on hedge funds’ activity regarding SYSCO Corporation (NYSE:SYY).

Hedge Funds’ activity around SYSCO Corporation (NYSE:SYY)

The total value of hedge funds’ investment in SYSCO Corporation (NYSE:SYY) increased to approximately $212 million at the close of the first quarter of 2015, from around $193 million in the previous quarter, nearly a 10% increase, despite shares falling by just under 5% during the first quarter. This too showed bullishness on the part of funds, which as mentioned, increased by 54% in terms of ownership.

According to the data of hedge funds tracked by website Insider Monkey, Donald Yacktman‘s Yacktman Asset Management had the biggest stake in SYSCO Corporation (NYSE:SYY), worth approximately $1.18 billion, comprising 5.5% of its total 13F portfolio. York Capital Management, led by James Dinan, has the second biggest stake in the food company, worth $92 million, comprising 0.6% of its 13F portfolio. Israel Englander‘s Millennium Management, Alex Snow‘s Lansdowne Partners and Ken Griffin’s Citadel Investment Group are some of the other notable hedge funds having long positions in SYSCO

Several investment firms recently downgraded their ratings for SYSCO Corporation (NYSE:SYY). The stock is down more than 3% after the recent court ruling, and insider sentiment is neutral. Though hedge funds were quite bullish, we don’t currently recommend a Buy for SYSCO Corporation (NYSE:SYY).

Disclosure: None


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