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Sonoco Products Company (SON): Hedge Funds De-risking

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 Sonoco Products Company (NYSE:SON).

Is Sonoco Products Company (NYSE:SON) a buy, sell, or hold? Hedge funds are becoming less confident. The number of bullish hedge fund bets were cut by 1 in recent months. Our calculations also showed that SON isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 58 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.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the 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 review the recent hedge fund action regarding Sonoco Products Company (NYSE:SON).

How have hedgies been trading Sonoco Products Company (NYSE:SON)?

Heading into the second quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SON over the last 18 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

The largest stake in Sonoco Products Company (NYSE:SON) was held by Citadel Investment Group, which reported holding $38.1 million worth of stock at the end of September. It was followed by Impax Asset Management with a $21 million position. Other investors bullish on the company included AQR Capital Management, Royce & Associates, and GAMCO Investors. In terms of the portfolio weights assigned to each position Appian Way Asset Management allocated the biggest weight to Sonoco Products Company (NYSE:SON), around 2.47% of its 13F portfolio. Navellier & Associates is also relatively very bullish on the stock, earmarking 0.42 percent of its 13F equity portfolio to SON.

Judging by the fact that Sonoco Products Company (NYSE:SON) has experienced bearish sentiment from hedge fund managers, it’s safe to say that there exists a select few funds that slashed their full holdings heading into Q4. Interestingly, Ray Dalio’s Bridgewater Associates cut the biggest investment of the “upper crust” of funds watched by Insider Monkey, valued at an estimated $1.4 million in stock, and Farnum Brown and Adam Seitchik’s Arjuna Capital was right behind this move, as the fund sold off about $1.3 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 1 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Sonoco Products Company (NYSE:SON). These stocks are Credit Acceptance Corp. (NASDAQ:CACC), Tallgrass Energy, LP (NYSE:TGE), BWX Technologies Inc (NYSE:BWXT), and Tech Data Corp (NASDAQ:TECD). This group of stocks’ market caps resemble SON’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CACC 22 581386 -9
TGE 38 692822 7
BWXT 24 107937 2
TECD 39 797204 5
Average 30.75 544837 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $545 million. That figure was $122 million in SON’s case. Tech Data Corp (NASDAQ:TECD) is the most popular stock in this table. On the other hand Credit Acceptance Corp. (NASDAQ:CACC) is the least popular one with only 22 bullish hedge fund positions. Sonoco Products Company (NYSE:SON) 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.9% in 2020 through June 10th and surpassed the market by 14.2 percentage points. Unfortunately SON wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SON investors were disappointed as the stock returned 16.3% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.