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Hedge Funds Aren’t Crazy About SUPERVALU INC. (SVU) Anymore Despite Blockbuster Merger With United Natural Foods

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed over the past few years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that hedge funds do have great stock picking skills, so let’s take a glance at the smart money sentiment towards SUPERVALU INC. (NYSE:SVU).

Is SUPERVALU INC. a buy, sell, or hold? Money managers are getting less bullish. The number of long hedge fund bets decreased by 1 recently. Our calculations also showed that SVU isn’t among the 30 most popular stocks among hedge funds. SVU was in 17 hedge funds’ portfolios at the end of September. There were 18 hedge funds in our database with SVU positions at the end of the previous quarter.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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.

RENAISSANCE TECHNOLOGIES

While collecting data for our write-up, we came across Miller Value Partners’ third-quarter 2018 letter to shareholders, that gives its opinion on SUPERVALU. The fund has a large position in the company and had this to say in the letter:

“One of our largest holdings, Supervalu (SVU) was acquired by United Natural Foods (UNFI), for $32.50/share. The acquisition price was 65%+ higher than SVU’s previous day’s closing price. Supervalu’s valuable real estate holdings and extensive distribution network supported an intrinsic value that was significantly higher than their market price.”

Our readers will be interested to know that Ms. Francesca Ruiz de Luzuriaga, a director of the company, was responsible for the last major purchase of the company’s common stock, snapping up 5,000 shares at $6.41.

What does the smart money think about SUPERVALU INC. (NYSE:SVU)?

Heading into the fourth quarter of 2018, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the second quarter of 2018. The graph below displays the number of hedge funds with a bullish position in SVU over the last 13 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

SVU_dec2018

More specifically, Magnetar Capital was the largest shareholder of SUPERVALU INC. (NYSE:SVU), with a stake worth $80.2 million reported as of the end of September. Trailing Magnetar Capital was Water Island Capital, which amassed a stake valued at $18.3 million. Alpine Associates, Renaissance Technologies, and Royce & Associates were also very fond of the stock, giving the stock large weights in their portfolios.

Since SUPERVALU INC. (NYSE:SVU) has experienced declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there is a sect of money managers who sold off their full holdings by the end of the third quarter. At the top of the heap, David Atterbury’s Whetstone Capital Advisors cut the largest investment of the “upper crust” of funds monitored by Insider Monkey, worth about $6.1 million in stock. Boaz Weinstein’s fund, Saba Capital, also dropped its stock, about $2.5 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 1 fund by the end of the third quarter.

Let’s now review hedge fund activity in other stocks similar to SUPERVALU INC. (NYSE:SVU). These stocks are Accelerate Diagnostics Inc (NASDAQ:AXDX), AllianzGI NFJ Dividend, Interest & Premium Strategy Fund (NYSE:NFJ), Ambarella Inc (NASDAQ:AMBA), and AtriCure Inc. (NASDAQ:ATRC). All of these stocks’ market caps are closest to SVU’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AXDX 6 61193 2
NFJ 4 7376 0
AMBA 15 81674 1
ATRC 22 188608 4
Average 11.75 84713 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 11.75 hedge funds with bullish positions and the average amount invested in these stocks was $85 million. That figure was $161 million in SVU’s case. AtriCure Inc. (NASDAQ:ATRC) is the most popular stock in this table. On the other hand, AllianzGI NFJ Dividend, Interest & Premium Strategy Fund (NYSE:NFJ) is the least popular one with only 4 bullish hedge fund positions. SUPERVALU INC. (NYSE:SVU) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard, ATRC might be a better candidate to consider a long position.

Disclosure: None. This article was originally published at Insider Monkey.

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