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Hedge Funds Soured On The Wendy’s Company (WEN) Before The Coronavirus

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 (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of The Wendy’s Company (NASDAQ:WEN).

The Wendy’s Company (NASDAQ:WEN) investors should pay attention to a decrease in activity from the world’s largest hedge funds of late. Our calculations also showed that WEN 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).

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 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. 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.

TRIAN PARTNERS

Nelson Peltz of Trian Partners

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 we’re going to analyze the key hedge fund action encompassing The Wendy’s Company (NASDAQ:WEN).

How are hedge funds trading The Wendy’s Company (NASDAQ:WEN)?

At Q4’s end, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -24% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in WEN over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Is WEN A Good Stock To Buy?

More specifically, Trian Partners was the largest shareholder of The Wendy’s Company (NASDAQ:WEN), with a stake worth $591.5 million reported as of the end of September. Trailing Trian Partners was Citadel Investment Group, which amassed a stake valued at $96.3 million. Two Sigma Advisors, Horizon Asset Management, and Cardinal Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Trian Partners allocated the biggest weight to The Wendy’s Company (NASDAQ:WEN), around 6.24% of its 13F portfolio. Horizon Asset Management is also relatively very bullish on the stock, earmarking 1.54 percent of its 13F equity portfolio to WEN.

Seeing as The Wendy’s Company (NASDAQ:WEN) has witnessed a decline in interest from the entirety of the hedge funds we track, we can see that there were a few hedgies that decided to sell off their entire stakes heading into Q4. It’s worth mentioning that Steven Boyd’s Armistice Capital said goodbye to the largest stake of all the hedgies tracked by Insider Monkey, worth close to $20 million in stock. Lee Ainslie’s fund, Maverick Capital, also dropped its stock, about $12.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 9 funds heading into Q4.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as The Wendy’s Company (NASDAQ:WEN) but similarly valued. We will take a look at L Brands Inc (NYSE:LB), Integra Lifesciences Holdings Corp (NASDAQ:IART), Blackstone Mortgage Trust Inc (NYSE:BXMT), and Axis Capital Holdings Limited (NYSE:AXS). This group of stocks’ market caps are similar to WEN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LB 46 681310 7
IART 17 115558 -6
BXMT 15 64533 -2
AXS 34 942398 2
Average 28 450950 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $451 million. That figure was $1040 million in WEN’s case. L Brands Inc (NYSE:LB) is the most popular stock in this table. On the other hand Blackstone Mortgage Trust Inc (NYSE:BXMT) is the least popular one with only 15 bullish hedge fund positions. The Wendy’s Company (NASDAQ:WEN) 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately WEN wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); WEN investors were disappointed as the stock returned -34.7% 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.
5 Most Popular Stocks Among Hedge Funds
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.

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