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Were Hedge Funds Right About Warming Up To The Kraft Heinz Company (KHC)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding The Kraft Heinz Company (NASDAQ:KHC) and determine whether hedge funds had an edge regarding this stock.

Is The Kraft Heinz Company (NASDAQ:KHC) undervalued? The best stock pickers were becoming hopeful. The number of long hedge fund positions rose by 5 in recent months. Our calculations also showed that KHC 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). KHC was in 39 hedge funds’ portfolios at the end of the first quarter of 2020. There were 34 hedge funds in our database with KHC holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

If you’d ask most shareholders, hedge funds are assumed to be unimportant, outdated financial vehicles of yesteryear. While there are greater than 8000 funds with their doors open at present, We choose to focus on the leaders of this group, about 850 funds. These money managers direct the lion’s share of the smart money’s total asset base, and by tailing their matchless investments, Insider Monkey has discovered many investment strategies that have historically defeated Mr. Market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

FAIRHOLME (FAIRX) Bruce Berkowitz

Bruce Berkowitz of Fairholme (FAIRX)

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. Now let’s review the key hedge fund action regarding The Kraft Heinz Company (NASDAQ:KHC).

What have hedge funds been doing with The Kraft Heinz Company (NASDAQ:KHC)?

At Q1’s end, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of 15% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KHC over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

The largest stake in The Kraft Heinz Company (NASDAQ:KHC) was held by Berkshire Hathaway, which reported holding $8056.2 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $55 million position. Other investors bullish on the company included Citadel Investment Group, Armistice Capital, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Berkshire Hathaway allocated the biggest weight to The Kraft Heinz Company (NASDAQ:KHC), around 4.59% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, earmarking 2.82 percent of its 13F equity portfolio to KHC.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, established the biggest position in The Kraft Heinz Company (NASDAQ:KHC). Arrowstreet Capital had $55 million invested in the company at the end of the quarter. Mark Coe’s Intrinsic Edge Capital also made a $20.8 million investment in the stock during the quarter. The following funds were also among the new KHC investors: Bruce Berkowitz’s Fairholme (FAIRX), Paul Marshall and Ian Wace’s Marshall Wace LLP, and Brandon Haley’s Holocene Advisors.

Let’s also examine hedge fund activity in other stocks similar to The Kraft Heinz Company (NASDAQ:KHC). We will take a look at General Motors Company (NYSE:GM), Workday Inc (NASDAQ:WDAY), Canadian Pacific Railway Limited (NYSE:CP), and The Bank of New York Mellon Corporation (NYSE:BK). This group of stocks’ market caps match KHC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GM 53 3020405 -22
WDAY 58 2259501 3
CP 32 1568644 3
BK 52 4401625 -6
Average 48.75 2812544 -5.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.75 hedge funds with bullish positions and the average amount invested in these stocks was $2813 million. That figure was $8315 million in KHC’s case. Workday Inc (NASDAQ:WDAY) is the most popular stock in this table. On the other hand Canadian Pacific Railway Limited (NYSE:CP) is the least popular one with only 32 bullish hedge fund positions. The Kraft Heinz Company (NASDAQ:KHC) 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 gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on KHC as the stock returned 30.6% during the second quarter and outperformed the market by an even larger margin.

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