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Were Hedge Funds Right About Piling Into Sprouts Farmers Market Inc (SFM)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Sprouts Farmers Market Inc (NASDAQ:SFM).

Is Sprouts Farmers Market Inc (NASDAQ:SFM) a superb investment right now? Investors who are in the know are becoming more confident. The number of long hedge fund bets rose by 1 lately. Our calculations also showed that SFM isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

SFM_oct2019

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. We’re going to take a gander at the latest hedge fund action regarding Sprouts Farmers Market Inc (NASDAQ:SFM).

How are hedge funds trading Sprouts Farmers Market Inc (NASDAQ:SFM)?

At the end of the second quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the first quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SFM over the last 16 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

GOTHAM ASSET MANAGEMENT

The largest stake in Sprouts Farmers Market Inc (NASDAQ:SFM) was held by Renaissance Technologies, which reported holding $112.7 million worth of stock at the end of March. It was followed by Impax Asset Management with a $34.7 million position. Other investors bullish on the company included D E Shaw, Winton Capital Management, and Millennium Management.

Now, specific money managers were breaking ground themselves. Gotham Asset Management, managed by Joel Greenblatt, created the most valuable position in Sprouts Farmers Market Inc (NASDAQ:SFM). Gotham Asset Management had $7.2 million invested in the company at the end of the quarter. Paul Tudor Jones’s Tudor Investment Corp also made a $1.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael Gelband’s ExodusPoint Capital, Brandon Haley’s Holocene Advisors, and Phil Frohlich’s Prescott Group Capital Management.

Let’s check out hedge fund activity in other stocks similar to Sprouts Farmers Market Inc (NASDAQ:SFM). We will take a look at ESCO Technologies Inc. (NYSE:ESE), NeoGenomics, Inc. (NASDAQ:NEO), Harsco Corporation (NYSE:HSC), and Franklin Electric Co., Inc. (NASDAQ:FELE). This group of stocks’ market values are closest to SFM’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ESE 4 2864 -3
NEO 17 92899 2
HSC 18 137306 -1
FELE 14 224900 -1
Average 13.25 114492 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $114 million. That figure was $259 million in SFM’s case. Harsco Corporation (NYSE:HSC) is the most popular stock in this table. On the other hand ESCO Technologies Inc. (NYSE:ESE) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Sprouts Farmers Market Inc (NASDAQ:SFM) 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. Hedge funds were also right about betting on SFM, though not to the same extent, as the stock returned 2.4% during the third quarter and outperformed the market as well.

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

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