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Were Hedge Funds Right About Piling Into Shake Shack Inc (SHAK)?

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 Shake Shack Inc (NYSE:SHAK) and determine whether the smart money was really smart about this stock.

Shake Shack Inc (NYSE:SHAK) was in 22 hedge funds’ portfolios at the end of the first quarter of 2020. SHAK investors should pay attention to a decrease in hedge fund interest recently. There were 25 hedge funds in our database with SHAK positions at the end of the previous quarter. Our calculations also showed that SHAK 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ricky Sandler of Eminence Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind let’s review the recent hedge fund action surrounding Shake Shack Inc (NYSE:SHAK).

What have hedge funds been doing with Shake Shack Inc (NYSE:SHAK)?

At the end of the first quarter, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SHAK over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

More specifically, Select Equity Group was the largest shareholder of Shake Shack Inc (NYSE:SHAK), with a stake worth $109.2 million reported as of the end of September. Trailing Select Equity Group was 12 West Capital Management, which amassed a stake valued at $105.8 million. Eminence Capital, Zevenbergen Capital Investments, and Darsana Capital Partners 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 12 West Capital Management allocated the biggest weight to Shake Shack Inc (NYSE:SHAK), around 6.3% of its 13F portfolio. Bandera Partners is also relatively very bullish on the stock, setting aside 2.86 percent of its 13F equity portfolio to SHAK.

Seeing as Shake Shack Inc (NYSE:SHAK) has faced falling interest from the aggregate hedge fund industry, logic holds that there was a specific group of hedge funds that slashed their entire stakes heading into Q4. Intriguingly, Renaissance Technologies sold off the biggest investment of the “upper crust” of funds monitored by Insider Monkey, totaling about $29.6 million in stock, and Brad Farber’s Atika Capital was right behind this move, as the fund said goodbye to about $5.2 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 3 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Shake Shack Inc (NYSE:SHAK) but similarly valued. We will take a look at Adtalem Global Education Inc. (NYSE:ATGE), 8×8, Inc. (NYSE:EGHT), NBT Bancorp Inc. (NASDAQ:NBTB), and Domtar Corporation (NYSE:UFS). This group of stocks’ market caps resemble SHAK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ATGE 12 268581 -8
EGHT 20 368670 6
NBTB 4 10462 -3
UFS 18 86572 -8
Average 13.5 183571 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $184 million. That figure was $394 million in SHAK’s case. 8×8, Inc. (NYSE:EGHT) is the most popular stock in this table. On the other hand NBT Bancorp Inc. (NASDAQ:NBTB) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Shake Shack Inc (NYSE:SHAK) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on SHAK as the stock returned 40.4% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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