In this article, we reviewed Candlestick’s losses from short bets and examined the top 10 holdings to determine whether its stock portfolio has the potential to recover losses.
Candlestick Capital Management, founded by former Citadel portfolio manager Jack Woodruff, is among the hedge fund losers in a tug of war with Reddit’s day traders. The hedge fund, which started fiscal 2021 with almost $3 billion, fell at a low- to mid-teens range on its short bets for the year through Wednesday. The losses came after the firm has generated annual returns of 26% in 2020, thanks to its positions in consumer discretionary and consumer staples stocks. Several other hedge funds including Steve Cohen Point72 and Dan Sundheim’s D1 Capital have also lost significantly amid a buying frenzy fueled by retail day traders.
Along with other stocks, GameStop was among the main focus of Reddit’s WallStreetBets crew over the past couple of weeks. Other prominent short squeezed stocks include BlackBerry (NYSE:BB), AMC Entertainment (AMC) Express (EXPR), Bed Bath & Beyond (BBBY), Koss (KOSS), and Nokia (NOK).
Hedge funds have also started closing their positions despite losses as shares of short squeezed stocks are not cooling off. Citron Research’s Andrew Left, for instance, stated on Wednesday that the firm has closed most of its short position at a loss of 100% when GameStop’s stock traded around $90.
One of the most well-known short bets investment firms Melvin Capital Management, which received a huge emergency cash injection of $2.75 billion from Steven Cohen, Ken Griffin, and other partners, is down 30% year to date due to its short bets on GameStop and other stocks. Reddit’s army has particularly targeted short bets of former star portfolio manager for Steven A. Cohen, Gabriel Plotkin. Melvin Capital, however, closed its GameStop positions this week (see Melvin Capital’s Top 10 Stock Holdings).
Short-sellers’ losses amounted to $5 billion in betting against GameStop alone, according to data from the financial-analytics firm S3 Partners. Steve Cohen’s hedge fund lost almost 15% in 2021 due to bets on GameStop, while Sundheim’s D1 Capital Partners is down about 20%. D1 Capital was one of the best performing hedge funds last year.
Image By peshkov – Adobe Stock
Maplelane Capital, which started the year with $3.5 billion and has a track record of annualized 30% gains since inception, lost about 45% this year through Wednesday amid short bets.
Besides wrong short bets in 2021, Jack Woodruff’s Candlestick Capital Management has outperformed the broader market index last year and its position in consumer discretionary, consumer staples and information technology stocks are performing well since the beginning of this year.
Hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 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 significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start examining Candlestick’s Top 10 stock holdings to determine whether its portfolio has the ability to recover losses it incurred on short bets. The hedge fund’s top 10 holdings represent 31.77% of the portfolio.
10. Darden Restaurants Inc (NYSE: DRI)
Although Darden Restaurants (NYSE: DRI) performed well during the second half of 2020, shares of restaurant stock underperformed since the beginning of this year. Fortunately, the hedge fund has capitalized on the rally in 2020 by selling a 34% stake in the September quarter. DRI is the tenth largest stock holding of Candlestick Capital Management, accounting for 1.80% of the overall portfolio.
The market pundits are optimistic about the future performance of large restaurant stocks. “We expect large chains to capitalize on the digital transformation to drive top-line growth, more efficient 1×1 marketing, and strategy decisions. Strong and improving unit-level economics and share opportunities from independent restaurant closures in 2020 support unit development,” Goldman Sachs said.
9. Keurig Dr Pepper Inc. (NASDAQ: KDP)
The beverage company Keurig Dr Pepper Inc. (NASDAQ: KDP) also underperformed compared to the tech-heavy NASDAQ and the broader market index in 2020 as well as during the first month of 2021. Its shares are up 13% in the last twelve months. KDP is the ninth-largest stock holding of Jack Woodruff’s hedge fund portfolio, accounting for 1.87% of the portfolio.
Oakmark Fund, which returned 6.2% for the third quarter, stated in an investor’s letter that Keurig Dr Pepper stock is trading at discount. Here is what Oakmark Funds stated:
“Keurig Dr Pepper is one of North America’s leading beverage companies and commands dominant positions in single-serve coffee and flavored sodas. We believe single-serve coffee pods will capture almost all of the incremental growth in at-home coffee consumption because coffee drinkers increasingly prefer K-Cups over drip brewing due to its greater convenience, quality, variety and value. Keurig’s competitive advantages (low-cost production, the largest installed base of brewers, exclusive brand partnerships) allow it to collect a toll on most pods sold in North America. The company’s soda franchises remain highly profitable, and we do not expect health-related concerns about sugar to materially impact consumption trends. We believe that Keurig’s brands should deliver steady growth, consistent market share gains and significant excess cash. We think the company is an above-average business trading at a meaningful discount to the broader market, its beverage peers and historical private market transactions.”
8. SeaWorld Entertainment, Inc. (NYSE: SEAS)
The hedge fund has used the dip in the theme park and entertainment company SeaWorld Entertainment, Inc. (NYSE: SEAS) stock price as buying opportunity and it appears that the strategy worked for the hedge fund. Jack Woodruff has initiated a position in SeaWorld during the second quarter and increased its stake by 7% during the September quarter. SeaWorld’s share price rallied almost 86% in the last six months.
The future fundamentals of SeaWorld improved significantly after coronavirus vaccine discovery. The company had posted a revenue drop of 77% for the September quarter.
7. Mastercard Incorporated (NYSE: MA)
The hedge funds strategy of buying Mastercard Incorporated (NYSE: MA) during the final quarter of 2019 didn’t work because shares of the payment technology company increased only 1.25% in the last twelve months. It is the seventh-largest stock holding of Candlestick’s 13F portfolio. However, the future fundamentals of Mastercard improved as international traveling resumed in the past couple of months.
Del Principe O’Brien Financial Advisors, which returned 8.9% for the third quarter, claimed that the dip in Mastercard stock price during last spring was a buying opportunity. Here is what Del Principe O’Brien Financial Advisors stated in an investors letter:
“The market pullback in the spring gave us a chance to become owners of Mastercard, one of the biggest players in the global payments industry. In fiscal year 2019, the company processed almost $5 trillion in purchase transactions and holds 29% of the global market share for credit cards and 24% of the global market for debit cards.
In June, Mastercard entered into an agreement to acquire Finicity, a financial data and insight provider, for a purchase price of $825 million. The move is meant to strengthen Mastercard’s existing open banking platform. Open banking is a system that gives third parties, including other banks and tech start-ups that provide financial services (think budgeting apps), digital access to financial data. A user-focused innovation in the banking industry, open banking is thought to be the future of banking. We see an active investment in its open banking platform as a good move for Mastercard toward maintaining its leadership in the global market.”
6. Coca-Cola European Partners plc (NYSE: CCEP)
Jack Woodruff’s strategy of buying Coca-Cola European Partners plc (NYSE: CCEP) stock during the pandemic related selloff worked for the hedge fund. Candlestick Capital Management has initiated a position in Coca-Cola European Partners during the second quarter and increased its stake by 90% during the September quarter. It is the sixth-largest stock holding of Candlestick’s 13F stock portfolio, accounting for 1.96% of the overall portfolio.
Shares of Coca-Cola European Partners grew 29% in the last three months compared to S&P 500 growth of 15.79%. Coca-Cola European Partners produces, distributes, and sells a range of non-alcoholic ready-to-drink beverages.
5. Post Holdings, Inc. (NYSE: POST)
Candlestick Capital Management has initiated a position in Post Holdings, Inc. (NYSE: POST) during the final quarter of 2019 and the hedge fund has raised its stake by 33% in the September quarter of last year. It is the fifth-largest stock holding of Candlestick’s 13F portfolio, accounting for 2.12% of the overall portfolio.
Post Holdings underperformed in the last twelve months due to negative revenue growth. Its shares are down 8.37% in the last twelve months.
First Eagle Investment Management believes that Post Holdings shares are trading at discount. Here is what First Eagle Investment Management stated in an investors letter:
“Post detracted in the quarter, as the company’s prepared-egg business—which historically has primarily served fast-food customers such as McDonalds—has been hurt in the near term by the pandemic. The company has temporarily shifted some of its egg production to retail supermarkets given the strong demand and is also seeing very solid demand for much of the remainder of its food portfolio, including cereals, frozen meals and shelf-stable protein shakes. We continue to believe the shares of Post are undervalued based on our estimate of their intrinsic value.”
4. FedEx Corporation (NYSE: FDX)
Air courier service FedEx Corporation (NYSE: FDX) is the fourth largest stock holding of Jack Woodruff’s portfolio. The firm has initiated a big position in the September quarter, accounting for 3.15% of the overall portfolio. Despite a strong performance in the first three quarters of 2020, FedEx underperformed in the final quarter of 2020 and extended the downside into the first month of 2021.
Cartenna Capital, which has posted a return of 5.6% for the third quarter, seeks to rebuild its position in FedEx Corporation as the opportunity arises. Here is what Cartenna stated in an investors letter:
“FedEx Corporation (“FDX”) was the Fund’s largest positive contributor to performance during Q3, and we remain very bullish on the entire parcel sector into Q4. When we initially purchased shares of FedEx, it represented an extremely attractive idiosyncratic opportunity embedded within our constructive transportation market outlook. For the past several years, we have generally held a negative bias on FedEx operations as they have routinely suffered from both macroeconomic headwinds (US-China trade war) and company specific issues that have been self-inflicted (i.e. lost Amazon as a customer, poor TNT acquisition/ransomware attack). However, as FedEx began their Fiscal Year 2021 in June, many of these headwinds were poised to reverse and become tailwinds. We have taken some profits recently but will look to build back our stake in FDX as opportunity arises.”
3. Amazon.com (NASDAQ: AMZN)
The hedge fund has sold 29% of its stake in Amazon.com (NASDAQ: AMZN) during the September quarter to capitalize on the share price rally. Despite that, Amazon is Candlestick’s third-largest stock holding, representing 3.53% of the overall portfolio.
L1 Capital International Fund, which has returned 5.1% for the third quarter, is bullish on the future fundamentals of Amazon. Here is what L1 Capital stated:
“Several investments in the technology sector were trimmed on valuation grounds with the proceeds used to increase our investment in Amazon. Amazon’s successful flywheel business model and Amazon Web Services are well known. However, we believe the current share price under‑appreciates:
– The consistency and longevity of Amazon’s growth potential in its key businesses;
– The importance of additional revenue streams such as advertising which are high margin and growing rapidly; and
– The strengthening barriers to competition and competitive advantages arising from Amazon’s stepped‑up investment in logistics and other infrastructure.”
2. L Brands, Inc. (NYSE: LB)
Candlestick Capital Management has benefited from its position in L Brands (NYSE: LB) because shares of L Brands rallied almost 100% in the last twelve months. Despite selling 28% of stake in the September quarter, LB is the second-largest stock holding of its 13F portfolio.
L Brands, Inc. operates as a specialty retailer of women’s intimate and other apparel, personal care, and beauty and home fragrance products. Its September quarter comparable sales soared 28% from the past year period and more than double the analysts estimate.
1. The Estée Lauder Companies Inc. (NYSE: EL)
Jack Woodruff has created a big position in The Estée Lauder Companies Inc. (NYSE: EL) during the September quarter and it appears that the hedge fund has benefited from its stake. Shares of the Estée Lauder Companies Inc. grew 11% in the last three months, extending the nine months gains to 45%.
Polen Capital Management, which has generated a return of 9.09% gross of fees from the Polen Global Growth Composite Portfolio for the third quarter, is bullish on the future fundamentals of The Estée Lauder Companies. Here is what Polen Capital Management stated:
“While Estée Lauder also has brick-and-mortar exposure, it has been successfully shifting its business online. In the most recent quarter, online accounted for roughly 40% of sales in both the U.S. and China, with online sales growing swiftly on a large base. Estée Lauder is the global market leader in prestige beauty products, which is a large and growing market. We believe competitive advantages consist of brands and economies of scale, similar in concept and execution to Nike and Adidas. Global cosmetics companies, and Estée Lauder in particular, have been pulling away from the “also-rans” as a result of their scale, global reach, capital, and new omnichannel and social capabilities. Like Nike and Adidas, Estée Lauder successfully executes the flywheel of reinvesting billions of dollars into supporting its brands. Last year, Estée Lauder spent ~$3.5B on advertising and promotion. This equates to ~24% of revenue, which is a hurdle consistently too high for new entrants to clear.”
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