Were Hedge Funds Right About The Chefs Warehouse, Inc (CHEF)?

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. Keeping this in mind, let’s take a look at whether The Chefs Warehouse, Inc (NASDAQ:CHEF) is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

The Chefs Warehouse, Inc (NASDAQ:CHEF) was in 7 hedge funds’ portfolios at the end of the fourth quarter of 2019. CHEF shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. There were 10 hedge funds in our database with CHEF positions at the end of the previous quarter. Our calculations also showed that CHEF 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).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we’re going to take a glance at the recent hedge fund action surrounding The Chefs Warehouse, Inc (NASDAQ:CHEF).

How have hedgies been trading The Chefs Warehouse, Inc (NASDAQ:CHEF)?

At the end of the fourth quarter, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of -30% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CHEF over the last 18 quarters. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

Is CHEF A Good Stock To Buy?

The largest stake in The Chefs Warehouse, Inc (NASDAQ:CHEF) was held by Renaissance Technologies, which reported holding $50.3 million worth of stock at the end of September. It was followed by Millennium Management with a $3.2 million position. Other investors bullish on the company included PDT Partners, AQR Capital Management, and Paloma Partners. In terms of the portfolio weights assigned to each position PDT Partners allocated the biggest weight to The Chefs Warehouse, Inc (NASDAQ:CHEF), around 0.06% of its 13F portfolio. Renaissance Technologies is also relatively very bullish on the stock, designating 0.04 percent of its 13F equity portfolio to CHEF.

Seeing as The Chefs Warehouse, Inc (NASDAQ:CHEF) has faced a decline in interest from hedge fund managers, it’s safe to say that there is a sect of money managers who sold off their full holdings by the end of the third quarter. Interestingly, Mika Toikka’s AlphaCrest Capital Management said goodbye to the biggest investment of the 750 funds tracked by Insider Monkey, worth close to $0.7 million in stock, and David Harding’s Winton Capital Management was right behind this move, as the fund dropped about $0.6 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 3 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as The Chefs Warehouse, Inc (NASDAQ:CHEF) but similarly valued. We will take a look at Apollo Investment Corp. (NASDAQ:AINV), CSW Industrials, Inc. (NASDAQ:CSWI), Model N Inc (NYSE:MODN), and Central European Media Enterprises Ltd. (NASDAQ:CETV). This group of stocks’ market valuations match CHEF’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AINV 9 43875 -2
CSWI 16 51267 -4
MODN 19 174173 0
CETV 10 41327 0
Average 13.5 77661 -1.5

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 $78 million. That figure was $56 million in CHEF’s case. Model N Inc (NYSE:MODN) is the most popular stock in this table. On the other hand Apollo Investment Corp. (NASDAQ:AINV) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks The Chefs Warehouse, Inc (NASDAQ:CHEF) is even less popular than AINV. Hedge funds dodged a bullet by taking a bearish stance towards CHEF. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but managed to beat the market by 12.9 percentage points. Unfortunately CHEF wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); CHEF investors were disappointed as the stock returned -66.8% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
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.