Were Hedge Funds Right About Dumping United Natural Foods, Inc. (UNFI) ?

As we already know from media reports and hedge fund investor letters, many hedge funds lost money in fourth quarter, blaming macroeconomic conditions and unpredictable events that hit several sectors, with technology among them. Nevertheless, most investors decided to stick to their bullish theses and their long-term focus allows us to profit from the recent declines. In particular, let’s take a look at what hedge funds think about United Natural Foods, Inc. (NYSE:UNFI) in this article.

United Natural Foods, Inc. (NYSE:UNFI) was in 15 hedge funds’ portfolios at the end of the fourth quarter of 2018. UNFI has experienced a decrease in activity from the world’s largest hedge funds lately. There were 21 hedge funds in our database with UNFI holdings at the end of the previous quarter. Our calculations also showed that unfi isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

John Overdeck of Two Sigma

Let’s take a look at the key hedge fund action surrounding United Natural Foods, Inc. (NYSE:UNFI).

How have hedgies been trading United Natural Foods, Inc. (NYSE:UNFI)?

At Q4’s end, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from the previous quarter. The graph below displays the number of hedge funds with bullish position in UNFI over the last 14 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

No of Hedge Funds with UNFI Positions

The largest stake in United Natural Foods, Inc. (NYSE:UNFI) was held by Valueworks LLC, which reported holding $51.5 million worth of stock at the end of December. It was followed by Arrowstreet Capital with a $10.4 million position. Other investors bullish on the company included Renaissance Technologies, Two Sigma Advisors, and Royce & Associates.

Due to the fact that United Natural Foods, Inc. (NYSE:UNFI) has experienced declining sentiment from hedge fund managers, it’s easy to see that there were a few money managers that decided to sell off their entire stakes last quarter. Intriguingly, Israel Englander’s Millennium Management said goodbye to the largest position of the 700 funds monitored by Insider Monkey, totaling an estimated $28.1 million in stock, and Ian Simm’s Impax Asset Management was right behind this move, as the fund sold off about $27.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 6 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to United Natural Foods, Inc. (NYSE:UNFI). We will take a look at Green Plains Inc. (NASDAQ:GPRE), Primo Water Corporation (NASDAQ:PRMW), Viomi Technology Co., Ltd (NASDAQ:VIOT), and Oasis Midstream Partners LP (NYSE:OMP). This group of stocks’ market valuations resemble UNFI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GPRE 14 116211 1
PRMW 14 138113 -2
VIOT 3 24289 -3
OMP 3 14603 1
Average 8.5 73304 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.5 hedge funds with bullish positions and the average amount invested in these stocks was $73 million. That figure was $106 million in UNFI’s case. Green Plains Inc. (NASDAQ:GPRE) is the most popular stock in this table. On the other hand Viomi Technology Co., Ltd (NASDAQ:VIOT) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks United Natural Foods, Inc. (NYSE:UNFI) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately UNFI wasn’t nearly as popular as these 15 stock and hedge funds that were betting on UNFI were disappointed as the stock returned 15.3% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.

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