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Were Hedge Funds Right About PepsiCo, Inc. (PEP)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The 800+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the fourth quarter, which unveil their equity positions as of December 31. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards PepsiCo, Inc. (NASDAQ:PEP).

Is PepsiCo, Inc. (NASDAQ:PEP) a buy here? The smart money is in a pessimistic mood. The number of bullish hedge fund bets were cut by 4 in recent months. Our calculations also showed that PEP isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). PEP was in 59 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 63 hedge funds in our database with PEP positions at the end of the previous quarter.

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 41 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.

Ric Dillon Diamond Hill Capital

Ric Dillon of Diamond Hill Capital

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when 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 take a look at the latest hedge fund action surrounding PepsiCo, Inc. (NASDAQ:PEP).

How are hedge funds trading PepsiCo, Inc. (NASDAQ:PEP)?

At Q4’s end, a total of 59 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards PEP over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, AQR Capital Management was the largest shareholder of PepsiCo, Inc. (NASDAQ:PEP), with a stake worth $887.1 million reported as of the end of September. Trailing AQR Capital Management was Yacktman Asset Management, which amassed a stake valued at $607.5 million. D E Shaw, Diamond Hill Capital, and Adage Capital Management 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 Yacktman Asset Management allocated the biggest weight to PepsiCo, Inc. (NASDAQ:PEP), around 7.68% of its 13F portfolio. Antipodes Partners is also relatively very bullish on the stock, designating 2.59 percent of its 13F equity portfolio to PEP.

Due to the fact that PepsiCo, Inc. (NASDAQ:PEP) has experienced declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain “tier” of hedge funds who were dropping their positions entirely in the third quarter. Intriguingly, Steve Cohen’s Point72 Asset Management dropped the biggest stake of all the hedgies tracked by Insider Monkey, valued at close to $142.2 million in stock. Ken Griffin’s fund, Citadel Investment Group, also dropped its stock, about $32.2 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 4 funds in the third quarter.

Let’s now review hedge fund activity in other stocks similar to PepsiCo, Inc. (NASDAQ:PEP). These stocks are The Boeing Company (NYSE:BA), Citigroup Inc. (NYSE:C), China Mobile Limited (NYSE:CHL), and Oracle Corporation (NYSE:ORCL). All of these stocks’ market caps match PEP’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BA 82 2856387 -1
C 98 11733711 -3
CHL 12 386065 0
ORCL 59 3719807 3
Average 62.75 4673993 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 62.75 hedge funds with bullish positions and the average amount invested in these stocks was $4674 million. That figure was $3107 million in PEP’s case. Citigroup Inc. (NYSE:C) is the most popular stock in this table. On the other hand China Mobile Limited (NYSE:CHL) is the least popular one with only 12 bullish hedge fund positions. PepsiCo, Inc. (NASDAQ:PEP) is not the least popular stock in this group but hedge fund interest is still below average. 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 lost 1.0% in 2020 through April 20th but still beat the market by 11 percentage points. A small number of hedge funds were also right about betting on PEP as the stock returned -0.9% during the same time period and outperformed the market by an even larger margin.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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