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Were Hedge Funds Right About Yum China Holdings, Inc. (YUMC)?

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. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Yum China Holdings, Inc. (NYSE:YUMC).

Yum China Holdings, Inc. (NYSE:YUMC) investors should be aware of a decrease in support from the world’s most elite money managers recently. Our calculations also showed that YUMC 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).

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 41 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 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Kerr Neilson of Platinum Asset Management

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. With all of this in mind let’s take a gander at the key hedge fund action encompassing Yum China Holdings, Inc. (NYSE:YUMC).

What have hedge funds been doing with Yum China Holdings, Inc. (NYSE:YUMC)?

At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards YUMC 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 considerably (or already accumulated large positions).

The largest stake in Yum China Holdings, Inc. (NYSE:YUMC) was held by Antipodes Partners, which reported holding $124.3 million worth of stock at the end of September. It was followed by Broad Peak Investment Holdings with a $115 million position. Other investors bullish on the company included Platinum Asset Management, GuardCap Asset Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Broad Peak Investment Holdings allocated the biggest weight to Yum China Holdings, Inc. (NYSE:YUMC), around 12.93% of its 13F portfolio. Sensato Capital Management is also relatively very bullish on the stock, earmarking 9.25 percent of its 13F equity portfolio to YUMC.

Due to the fact that Yum China Holdings, Inc. (NYSE:YUMC) has witnessed declining sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of hedge funds who sold off their positions entirely in the third quarter. It’s worth mentioning that Yi Xin’s Ariose Capital sold off the largest investment of all the hedgies followed by Insider Monkey, valued at about $19.3 million in stock, and Ryan Caldwell’s Chiron Investment Management was right behind this move, as the fund dropped about $14 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 5 funds in the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Yum China Holdings, Inc. (NYSE:YUMC) but similarly valued. We will take a look at CMS Energy Corporation (NYSE:CMS), Marvell Technology Group Ltd. (NASDAQ:MRVL), Arthur J. Gallagher & Co. (NYSE:AJG), and ArcelorMittal (NYSE:MT). This group of stocks’ market valuations resemble YUMC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CMS 30 526352 0
MRVL 29 584397 -5
AJG 31 395355 4
MT 17 353286 3
Average 26.75 464848 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $465 million. That figure was $699 million in YUMC’s case. Arthur J. Gallagher & Co. (NYSE:AJG) is the most popular stock in this table. On the other hand ArcelorMittal (NYSE:MT) is the least popular one with only 17 bullish hedge fund positions. Yum China Holdings, Inc. (NYSE:YUMC) is not the most popular stock in this group but hedge fund interest is still above 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 1.0% in 2020 through May 1st but still beat the market by 12.9 percentage points. Hedge funds were also right about betting on YUMC, though not to the same extent, as the stock returned -3.1% during the first four months of 2020 (through May 1st) and outperformed the market as well.
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.

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