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Hedge Funds Are Selling Flowers Foods, Inc. (FLO)

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Flowers Foods, Inc. (NYSE:FLO) and determine whether hedge funds skillfully traded this stock.

Is Flowers Foods, Inc. (NYSE:FLO) a buy right now? Money managers were getting less bullish. The number of bullish hedge fund positions dropped by 3 in recent months. Flowers Foods, Inc. (NYSE:FLO) was in 24 hedge funds’ portfolios at the end of June. The all time high for this statistics is 31. Our calculations also showed that FLO 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.

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 56 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.

Ric Dillon Diamond Hill Capital

Ric Dillon of Diamond Hill Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s take a gander at the new hedge fund action surrounding Flowers Foods, Inc. (NYSE:FLO).

How are hedge funds trading Flowers Foods, Inc. (NYSE:FLO)?

At the end of June, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the previous quarter. The graph below displays the number of hedge funds with bullish position in FLO over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Renaissance Technologies has the biggest position in Flowers Foods, Inc. (NYSE:FLO), worth close to $112.5 million, accounting for 0.1% of its total 13F portfolio. The second largest stake is held by Diamond Hill Capital, led by Ric Dillon, holding a $49.6 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Remaining peers that are bullish consist of Cliff Asness’s AQR Capital Management, John Overdeck and David Siegel’s Two Sigma Advisors and Mario Gabelli’s GAMCO Investors. In terms of the portfolio weights assigned to each position Quantinno Capital allocated the biggest weight to Flowers Foods, Inc. (NYSE:FLO), around 0.34% of its 13F portfolio. Diamond Hill Capital is also relatively very bullish on the stock, setting aside 0.29 percent of its 13F equity portfolio to FLO.

Due to the fact that Flowers Foods, Inc. (NYSE:FLO) has experienced bearish sentiment from hedge fund managers, it’s safe to say that there were a few money managers that decided to sell off their full holdings in the second quarter. It’s worth mentioning that Noam Gottesman’s GLG Partners dumped the biggest investment of the “upper crust” of funds followed by Insider Monkey, totaling about $2.6 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also sold off its stock, about $1.8 million worth. These moves are important to note, as aggregate hedge fund interest was cut by 3 funds in the second quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Flowers Foods, Inc. (NYSE:FLO) but similarly valued. These stocks are Nutanix, Inc. (NASDAQ:NTNX), HollyFrontier Corporation (NYSE:HFC), CRISPR Therapeutics AG (NASDAQ:CRSP), The Gap Inc. (NYSE:GPS), ServiceMaster Global Holdings Inc (NYSE:SERV), Primerica, Inc. (NYSE:PRI), and Targa Resources Corp (NYSE:TRGP). This group of stocks’ market caps match FLO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NTNX 20 584504 -9
HFC 27 273880 3
CRSP 31 296881 0
GPS 38 459419 14
SERV 35 725891 4
PRI 25 385205 2
TRGP 31 289537 2
Average 29.6 430760 2.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.6 hedge funds with bullish positions and the average amount invested in these stocks was $431 million. That figure was $269 million in FLO’s case. The Gap Inc. (NYSE:GPS) is the most popular stock in this table. On the other hand Nutanix, Inc. (NASDAQ:NTNX) is the least popular one with only 20 bullish hedge fund positions. Flowers Foods, Inc. (NYSE:FLO) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for FLO is 36.3. 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. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately FLO wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); FLO investors were disappointed as the stock returned 7% since Q2 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.