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 Papa John’s International, Inc. (NASDAQ:PZZA) and determine whether hedge funds had an edge regarding this stock.
Papa John’s International, Inc. (NASDAQ:PZZA) investors should be aware of an increase in activity from the world’s largest hedge funds recently. Papa John’s International, Inc. (NASDAQ:PZZA) was in 34 hedge funds’ portfolios at the end of June. The all time high for this statistics is 29. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 29 hedge funds in our database with PZZA positions at the end of the first quarter. Our calculations also showed that PZZA 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).
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.
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. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. 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. With all of this in mind let’s take a look at the new hedge fund action encompassing Papa John’s International, Inc. (NASDAQ:PZZA).
What have hedge funds been doing with Papa John’s International, Inc. (NASDAQ:PZZA)?
Heading into the third quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PZZA over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Renaissance Technologies, holds the most valuable position in Papa John’s International, Inc. (NASDAQ:PZZA). Renaissance Technologies has a $95.4 million position in the stock, comprising 0.1% of its 13F portfolio. The second most bullish fund manager is Arrowstreet Capital, led by Peter Rathjens, Bruce Clarke and John Campbell, holding a $52.8 million position; 0.1% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions encompass Ryan Frick and Oliver Evans’s Dorsal Capital Management, Alexander Mitchell’s Scopus Asset Management and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position MIK Capital allocated the biggest weight to Papa John’s International, Inc. (NASDAQ:PZZA), around 8.35% of its 13F portfolio. Stormborn Capital Management is also relatively very bullish on the stock, designating 8.23 percent of its 13F equity portfolio to PZZA.
With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest position in Papa John’s International, Inc. (NASDAQ:PZZA). Arrowstreet Capital had $52.8 million invested in the company at the end of the quarter. Alexander Mitchell’s Scopus Asset Management also made a $26.8 million investment in the stock during the quarter. The other funds with brand new PZZA positions are Kamyar Khajavi’s MIK Capital, Peter Muller’s PDT Partners, and Elise Di Vincenzo Crumbine’s Stormborn Capital Management.
Let’s go over hedge fund activity in other stocks similar to Papa John’s International, Inc. (NASDAQ:PZZA). We will take a look at Sanderson Farms, Inc. (NASDAQ:SAFM), Rapid7 Inc (NASDAQ:RPD), Ping Identity Holding Corp. (NYSE:PING), EPR Properties (NYSE:EPR), Stitch Fix, Inc. (NASDAQ:SFIX), Denali Therapeutics Inc. (NASDAQ:DNLI), and Artisan Partners Asset Management Inc (NYSE:APAM). All of these stocks’ market caps match PZZA’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.6 hedge funds with bullish positions and the average amount invested in these stocks was $179 million. That figure was $404 million in PZZA’s case. Stitch Fix, Inc. (NASDAQ:SFIX) is the most popular stock in this table. On the other hand Rapid7 Inc (NASDAQ:RPD) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Papa John’s International, Inc. (NASDAQ:PZZA) is more popular among hedge funds. Our overall hedge fund sentiment score for PZZA is 90. 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 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on PZZA as the stock returned 24.1% 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.