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 (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. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding UniFirst Corp (NYSE:UNF).
UniFirst Corp (NYSE:UNF) has experienced a decrease in activity from the world’s largest hedge funds recently. Our calculations also showed that UNF 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).
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 was 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’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.
Chuck Royce of Royce & Associates
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 take a gander at the key hedge fund action regarding UniFirst Corp (NYSE:UNF).
How have hedgies been trading UniFirst Corp (NYSE:UNF)?
At Q4’s end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in UNF 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.
Among these funds, GLG Partners held the most valuable stake in UniFirst Corp (NYSE:UNF), which was worth $34.1 million at the end of the third quarter. On the second spot was Echo Street Capital Management which amassed $22.2 million worth of shares. Carlson Capital, Royce & Associates, and Alkeon Capital Management 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 Third Avenue Management allocated the biggest weight to UniFirst Corp (NYSE:UNF), around 0.38% of its 13F portfolio. Carlson Capital is also relatively very bullish on the stock, setting aside 0.36 percent of its 13F equity portfolio to UNF.
Due to the fact that UniFirst Corp (NYSE:UNF) has faced falling interest from the smart money, it’s easy to see that there was a specific group of fund managers that decided to sell off their full holdings heading into Q4. It’s worth mentioning that Vikas Lunia’s Lunia Capital dropped the biggest investment of all the hedgies tracked by Insider Monkey, comprising an estimated $8.3 million in stock, and David MacKnight’s One Fin Capital Management was right behind this move, as the fund said goodbye to about $6.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 3 funds heading into Q4.
Let’s go over hedge fund activity in other stocks similar to UniFirst Corp (NYSE:UNF). We will take a look at Six Flags Entertainment Corp (NYSE:SIX), The Macerich Company (NYSE:MAC), Ormat Technologies, Inc. (NYSE:ORA), and Nektar Therapeutics (NASDAQ:NKTR). This group of stocks’ market values are similar to UNF’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SIX | 38 | 609215 | -3 |
| MAC | 26 | 222927 | 3 |
| ORA | 16 | 193093 | -1 |
| NKTR | 26 | 230140 | 7 |
| Average | 26.5 | 313844 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $314 million. That figure was $159 million in UNF’s case. Six Flags Entertainment Corp (NYSE:SIX) is the most popular stock in this table. On the other hand Ormat Technologies, Inc. (NYSE:ORA) is the least popular one with only 16 bullish hedge fund positions. UniFirst Corp (NYSE:UNF) 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 UNF wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); UNF investors were disappointed as the stock returned -32.1% 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.
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.
