Hedge Funds’ Favorite Restaurants Include McDonald’s Corp. (MCD), Yum! Brands Inc. (YUM), and Starbucks Corporation (SBUX)

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The U.S restaurant industry has been performing quite strongly over the last few years. Even more to that, the first quarter of this year turned out to be the best for the industry since the Great Depression. The S&P 500 Restaurants Sub-Index has returned 15.32% over the latest one-year period, which was mainly assisted by the strengthening U.S economy in the form of improved job prospects, rising wages, lower gasoline prices, and revitalized optimism. Given the strong performance of this industry, it is not surprising that hedge funds were piling into restaurants stocks in the first half of the year. In the following article, we will be discussing three favorite restaurant stocks among the hedge funds we track.


Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 118% over the last 36 months and outperformed the S&P 500 Index by over 60 percentage points (see the details here).

3. Starbucks Corporation (NASDAQ:SBUX)

Investors with Long Positions (as of June 30): 46

Aggregate Value of Investors’ Holdings (as of June 30): $1.03 Billion

Let’s begin by looking at Starbucks Corporation (NASDAQ:SBUX), which is considered more of a “specialty eatery” than a restaurant. The number of hedge funds we observe owning stakes in the company decreased from 54 over the course of the second quarter, whereas the value of the stakes grew from $962.13 million. The stock has returned over 33% year-to-date, not including the quarterly dividend paid out to shareholders. Starbucks has been very successful in producing steadily growing streams of revenue from its cafes, so the company is expected to pay out even higher cash dividends in the future. Over the last few years, the company has been distributing more cash to its shareholders in the form of a quickly growing dividend, which currently offers a yield of 1.20%, and the trend is expected to continue. Starbucks Corporation (NASDAQ:SBUX)’s international expansion and the fast-growing consumer packaged-foods business will most likely result in higher revenue and profits for Starbucks in the upcoming years, which is what most investors expect from this type of company. Clifford Fox’s Columbus Circle Investors is one of the largest equity holders of Starbucks within our database, holding a stake of 3.57 million shares.

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