We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (10 coronavirus predictions).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 835 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Luckin Coffee Inc. (NASDAQ:LK).
Luckin Coffee Inc. (NASDAQ:LK) investors should be aware of an increase in hedge fund interest recently. Our calculations also showed that LK isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
John Armitage of Egerton Capital
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s go over the key hedge fund action surrounding Luckin Coffee Inc. (NASDAQ:LK).
What does smart money think about Luckin Coffee Inc. (NASDAQ:LK)?
At Q4’s end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 43% from the previous quarter. The graph below displays the number of hedge funds with bullish position in LK over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Lone Pine Capital has the number one position in Luckin Coffee Inc. (NASDAQ:LK), worth close to $238.8 million, comprising 1.3% of its total 13F portfolio. The second most bullish fund manager is Alkeon Capital Management, led by Panayotis Takis Sparaggis, holding a $157.6 million position; the fund has 0.6% of its 13F portfolio invested in the stock. Other professional money managers that are bullish consist of Gabriel Plotkin’s Melvin Capital Management, Anand Desai’s Darsana Capital Partners and Daniel Patrick Gibson’s Sylebra Capital Management. In terms of the portfolio weights assigned to each position Keywise Capital Management allocated the biggest weight to Luckin Coffee Inc. (NASDAQ:LK), around 16.22% of its 13F portfolio. North Peak Capital is also relatively very bullish on the stock, dishing out 8.6 percent of its 13F equity portfolio to LK.
As industrywide interest jumped, key money managers have been driving this bullishness. Lone Pine Capital, initiated the largest position in Luckin Coffee Inc. (NASDAQ:LK). Lone Pine Capital had $238.8 million invested in the company at the end of the quarter. Daniel Patrick Gibson’s Sylebra Capital Management also made a $56.1 million investment in the stock during the quarter. The following funds were also among the new LK investors: Fang Zheng’s Keywise Capital Management, Alok Agrawal’s Bloom Tree Partners, and John Armitage’s Egerton Capital Limited.
Let’s now review hedge fund activity in other stocks similar to Luckin Coffee Inc. (NASDAQ:LK). We will take a look at Autohome Inc (NYSE:ATHM), UGI Corp (NYSE:UGI), Lennox International Inc. (NYSE:LII), and Nordson Corporation (NASDAQ:NDSN). This group of stocks’ market values resemble LK’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ATHM | 13 | 816653 | 1 |
| UGI | 23 | 290279 | 1 |
| LII | 32 | 295284 | 7 |
| NDSN | 29 | 152005 | 13 |
| Average | 24.25 | 388555 | 5.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $389 million. That figure was $1149 million in LK’s case. Lennox International Inc. (NYSE:LII) is the most popular stock in this table. On the other hand Autohome Inc (NYSE:ATHM) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Luckin Coffee Inc. (NASDAQ:LK) is more popular among hedge funds. 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 22.3% in 2020 through March 16th but still managed to beat the market by 3.2 percentage points. Hedge funds were also right about betting on LK, though not to the same extent, as the stock returned -23.1% during the first quarter (through March 16th) and outperformed the market as well.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
