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Were Hedge Funds Right About Piling Into Sonos, Inc. (SONO)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of Sonos, Inc. (NASDAQ:SONO) based on that data and determine whether they were really smart about the stock.

Sonos, Inc. (NASDAQ:SONO) shareholders have witnessed an increase in enthusiasm from smart money lately. Our calculations also showed that SONO 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.

Sahm Adrangi Kerrisdale Capital

Sahm Adrangi of Kerrisdale Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a gander at the key hedge fund action encompassing Sonos, Inc. (NASDAQ:SONO).

How have hedgies been trading Sonos, Inc. (NASDAQ:SONO)?

Heading into the second quarter of 2020, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 27% from the fourth quarter of 2019. By comparison, 22 hedge funds held shares or bullish call options in SONO a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Trigran Investments, managed by Douglas T. Granat, holds the biggest position in Sonos, Inc. (NASDAQ:SONO). Trigran Investments has a $25.3 million position in the stock, comprising 5.5% of its 13F portfolio. On Trigran Investments’s heels is Renaissance Technologies, with a $23 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Remaining peers with similar optimism consist of D. E. Shaw’s D E Shaw, David Brown’s Hawk Ridge Management and C. Ashton Newhall and James Lim’s Greenspring Associates. In terms of the portfolio weights assigned to each position Greenspring Associates allocated the biggest weight to Sonos, Inc. (NASDAQ:SONO), around 6.21% of its 13F portfolio. Trigran Investments is also relatively very bullish on the stock, setting aside 5.55 percent of its 13F equity portfolio to SONO.

As industrywide interest jumped, some big names were leading the bulls’ herd. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, initiated the largest position in Sonos, Inc. (NASDAQ:SONO). Marshall Wace LLP had $10.2 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $1.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Jeffrey Diehl’s Adams Street Partners, Sahm Adrangi’s Kerrisdale Capital, and J. Daniel Plants’s Voce Capital.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Sonos, Inc. (NASDAQ:SONO) but similarly valued. These stocks are Carpenter Technology Corporation (NYSE:CRS), Sixth Street Specialty Lending Inc (NYSE:TSLX), Methanex Corporation (NASDAQ:MEOH), and Boise Cascade Co (NYSE:BCC). This group of stocks’ market valuations match SONO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CRS 16 47508 0
TSLX 13 34398 3
MEOH 12 46085 -4
BCC 18 37882 -6
Average 14.75 41468 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $41 million. That figure was $140 million in SONO’s case. Boise Cascade Co (NYSE:BCC) is the most popular stock in this table. On the other hand Methanex Corporation (NASDAQ:MEOH) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Sonos, Inc. (NASDAQ:SONO) 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 SONO as the stock returned 72.5% 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.