Were Hedge Funds Right About Dumping Tyson Foods, Inc. (TSN)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Tyson Foods, Inc. (NYSE:TSN).

Tyson Foods, Inc. (NYSE:TSN) shareholders have witnessed a decrease in support from the world’s most elite money managers in recent months. Tyson Foods, Inc. (NYSE:TSN) was in 37 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 58. Our calculations also showed that TSN isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s view the key hedge fund action surrounding Tyson Foods, Inc. (NYSE:TSN).

What have hedge funds been doing with Tyson Foods, Inc. (NYSE:TSN)?

At second quarter’s end, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the first quarter of 2020. By comparison, 39 hedge funds held shares or bullish call options in TSN a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

The largest stake in Tyson Foods, Inc. (NYSE:TSN) was held by AQR Capital Management, which reported holding $174.7 million worth of stock at the end of June. It was followed by Iridian Asset Management with a $106 million position. Other investors bullish on the company included Citadel Investment Group, Polaris Capital Management, and Bristol Gate Capital Partners. In terms of the portfolio weights assigned to each position Bristol Gate Capital Partners allocated the biggest weight to Tyson Foods, Inc. (NYSE:TSN), around 4.49% of its 13F portfolio. Polaris Capital Management is also relatively very bullish on the stock, designating 3.34 percent of its 13F equity portfolio to TSN.

Because Tyson Foods, Inc. (NYSE:TSN) has witnessed a decline in interest from hedge fund managers, it’s safe to say that there exists a select few fund managers that slashed their full holdings in the second quarter. It’s worth mentioning that Jack Woodruff’s Candlestick Capital Management sold off the largest stake of the 750 funds tracked by Insider Monkey, worth an estimated $33.9 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dumped about $21.1 million worth. These moves are interesting, as total hedge fund interest was cut by 4 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Tyson Foods, Inc. (NYSE:TSN) but similarly valued. We will take a look at Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK), CrowdStrike Holdings, Inc. (NASDAQ:CRWD), Align Technology, Inc. (NASDAQ:ALGN), Welltower Inc. (NYSE:WELL), Sun Life Financial Inc. (NYSE:SLF), Stanley Black & Decker, Inc. (NYSE:SWK), and Skyworks Solutions Inc (NASDAQ:SWKS). This group of stocks’ market values are similar to TSN’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.1 hedge funds with bullish positions and the average amount invested in these stocks was $1135 million. That figure was $649 million in TSN’s case. CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is the most popular stock in this table. On the other hand Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (NYSE:TLK) is the least popular one with only 4 bullish hedge fund positions. Tyson Foods, Inc. (NYSE:TSN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for TSN is 42.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately TSN wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TSN were disappointed as the stock returned -3.5% since the end of June (through 10/30) 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.

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