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Hedge Funds Bought SYSCO Corporation (SYY) Too Early

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing 835 13F filings submitted by hedge funds and prominent investors. These filings show these funds’ portfolio positions as of December 31st, 2019. What do these smart investors think about SYSCO Corporation (NYSE:SYY)?

Is SYSCO Corporation (NYSE:SYY) undervalued? Prominent investors are getting more bullish. The number of bullish hedge fund bets advanced by 3 lately. Our calculations also showed that SYY isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). SYY was in 28 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 25 hedge funds in our database with SYY positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 41 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.

TRIAN PARTNERS

Nelson Peltz of Trian Partners

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind we’re going to take a glance at the fresh hedge fund action surrounding SYSCO Corporation (NYSE:SYY).

How have hedgies been trading SYSCO Corporation (NYSE:SYY)?

At the end of the fourth quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from one quarter earlier. By comparison, 34 hedge funds held shares or bullish call options in SYY a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Is SYY A Good Stock To Buy?

The largest stake in SYSCO Corporation (NYSE:SYY) was held by Trian Partners, which reported holding $2025.3 million worth of stock at the end of September. It was followed by Yacktman Asset Management with a $325.4 million position. Other investors bullish on the company included Two Sigma Advisors, Renaissance Technologies, and AQR Capital Management. In terms of the portfolio weights assigned to each position Trian Partners allocated the biggest weight to SYSCO Corporation (NYSE:SYY), around 21.35% of its 13F portfolio. Yacktman Asset Management is also relatively very bullish on the stock, dishing out 4.11 percent of its 13F equity portfolio to SYY.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, created the most valuable position in SYSCO Corporation (NYSE:SYY). Balyasny Asset Management had $5.6 million invested in the company at the end of the quarter. Bruce Kovner’s Caxton Associates LP also made a $5.2 million investment in the stock during the quarter. The other funds with brand new SYY positions are Lee Ainslie’s Maverick Capital, Anand Parekh’s Alyeska Investment Group, and Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as SYSCO Corporation (NYSE:SYY) but similarly valued. We will take a look at National Grid plc (NYSE:NGG), Sempra Energy (NYSE:SRE), Baxter International Inc. (NYSE:BAX), and Lam Research Corporation (NASDAQ:LRCX). This group of stocks’ market valuations match SYY’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NGG 6 439511 -4
SRE 35 717221 4
BAX 47 3519863 8
LRCX 52 2625592 0
Average 35 1825547 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 35 hedge funds with bullish positions and the average amount invested in these stocks was $1826 million. That figure was $3021 million in SYY’s case. Lam Research Corporation (NASDAQ:LRCX) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 6 bullish hedge fund positions. SYSCO Corporation (NYSE:SYY) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but beat the market by 3.1 percentage points. Unfortunately SYY wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SYY investors were disappointed as the stock returned -35.5% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.

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

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