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Was Hedge Funds’ Crystal Ball Right About The Hershey Company (HSY)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded The Hershey Company (NYSE:HSY) and determine whether the smart money was really smart about this stock.

Is The Hershey Company (NYSE:HSY) the right pick for your portfolio? Prominent investors were turning less bullish. The number of long hedge fund positions dropped by 6 recently. Our calculations also showed that HSY 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.

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 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 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.

BRIDGEWATER ASSOCIATES

Ray Dalio of Bridgewater Associates

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a peek at the recent hedge fund action regarding The Hershey Company (NYSE:HSY).

What does smart money think about The Hershey Company (NYSE:HSY)?

Heading into the second quarter of 2020, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in HSY over the last 18 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

More specifically, Renaissance Technologies was the largest shareholder of The Hershey Company (NYSE:HSY), with a stake worth $696.3 million reported as of the end of September. Trailing Renaissance Technologies was AQR Capital Management, which amassed a stake valued at $119.7 million. GLG Partners, Adage Capital Management, and Citadel Investment Group 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 Cognios Capital allocated the biggest weight to The Hershey Company (NYSE:HSY), around 0.85% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, setting aside 0.68 percent of its 13F equity portfolio to HSY.

Seeing as The Hershey Company (NYSE:HSY) has experienced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there is a sect of hedge funds who sold off their entire stakes in the first quarter. Interestingly, Matthew Tewksbury’s Stevens Capital Management dropped the largest investment of the 750 funds followed by Insider Monkey, worth close to $3.3 million in stock, and Matthew Hulsizer’s PEAK6 Capital Management was right behind this move, as the fund dropped about $2.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 6 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to The Hershey Company (NYSE:HSY). We will take a look at Chunghwa Telecom Co., Ltd (NYSE:CHT), ICICI Bank Limited (NYSE:IBN), Constellation Brands, Inc. (NYSE:STZ), and Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC). This group of stocks’ market values are closest to HSY’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CHT 6 123577 2
IBN 24 378931 -5
STZ 50 1504770 -2
ERIC 20 366624 2
Average 25 593476 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $593 million. That figure was $958 million in HSY’s case. Constellation Brands, Inc. (NYSE:STZ) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 6 bullish hedge fund positions. The Hershey Company (NYSE:HSY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 12.3% in 2020 through June 30th but beat the market by 15.5 percentage points. Unfortunately HSY wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on HSY were disappointed as the stock returned -1.6% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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