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Were Hedge Funds Right About Flocking Into The Kraft Heinz Company (KHC) ?

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 12 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of The Kraft Heinz Company (NASDAQ:KHC).

The Kraft Heinz Company (NASDAQ:KHC) shareholders have witnessed an increase in activity from the world’s largest hedge funds of late. Our calculations also showed that KHC isn’t among the 30 most popular stocks among hedge funds.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 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.

KHC_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a gander at the new hedge fund action surrounding The Kraft Heinz Company (NASDAQ:KHC).

What does smart money think about The Kraft Heinz Company (NASDAQ:KHC)?

Heading into the third quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the previous quarter. On the other hand, there were a total of 27 hedge funds with a bullish position in KHC a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Lee Ainslie MAVERICK CAPITAL

More specifically, Berkshire Hathaway was the largest shareholder of The Kraft Heinz Company (NASDAQ:KHC), with a stake worth $10107.7 million reported as of the end of March. Trailing Berkshire Hathaway was Citadel Investment Group, which amassed a stake valued at $128.3 million. Millennium Management, Alyeska Investment Group, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, assembled the most valuable position in The Kraft Heinz Company (NASDAQ:KHC). Marshall Wace LLP had $36.9 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $35.8 million position during the quarter. The other funds with new positions in the stock are Benjamin A. Smith’s Laurion Capital Management, David Costen Haley’s HBK Investments, and Lee Ainslie’s Maverick Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as The Kraft Heinz Company (NASDAQ:KHC) but similarly valued. We will take a look at Ecopetrol S.A. (NYSE:EC), Energy Transfer L.P. (NYSE:ET), National Grid plc (NYSE:NGG), and Dow Inc. (NYSE:DOW). This group of stocks’ market caps are similar to KHC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EC 10 189695 -5
ET 29 763141 1
NGG 8 532366 0
DOW 33 325782 25
Average 20 452746 5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $453 million. That figure was $10580 million in KHC’s case. Dow Inc. (NYSE:DOW) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks The Kraft Heinz Company (NASDAQ:KHC) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately KHC wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KHC were disappointed as the stock returned -8.6% during the third 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 20 most popular stocks among hedge funds as many of these stocks already outperformed the market in Q3.

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

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