It's easy to see what billionaire hedge fund managers buy and sell every quarter. Although you generally don't get to watch it in real time, hedge funds are required to file a quarterly update with the Securities and Exchange Commission (SEC), and these filings are available to the public.
It seems like a good idea to check out what stocks billionaire managers are buying and selling. But is it?
John Overdeck and David Seigel from Two Sigma Investments and Michael Burry of Scion Asset Management both just sold shares of Toast (TOST +2.63%) stock. Two Sigma reduced its position by 47%, and Burry sold out of his fund's entire stake. Should retail investors follow suit?
Toast is heating up
Toast operates a management platform for restaurants. It connects all services into one, easy-to-use app, and it includes hardware and software. These are services like supply management, menu selection, payment processing, and more. Everything syncs together for an efficient and automated system.
It's easy to see why this could be very attractive to restaurants. For restaurants still using legacy accounting software and pen-and-pad ordering, Toast's system speeds up processes and ultimately saves money. Toast has many tiers and packages targeting every stripe of restaurant, like a cafe, pizza shop, or bakery, with a vertically integrated program that can improve overall operations.
It's not surprising that Toast has been adding tons of new locations and generating higher sales. Average recurring revenue (ARR) increased 32% year over year in the 2024 first quarter, and it added 6,000 new locations in the quarter for a total of 112,000.
Is Toast toast?
From an investor's perspective, Toast runs a compelling business. It has a strong recurring revenue stream with a software-as-a-service (SaaS) model, and once a client signs up, there's the SaaS fee as well as payment processing fees. That's why its favored top-line metric is ARR.
There's also a healthy network effect feeding into the company's growth, and it has been able to ramp up sales without ramping up marketing expenses. Seventy-five percent of new business comes from inbound channels, with 20% coming from customer referrals. It's winning an even bigger share of new restaurants that don't have legacy operations and are opening with tech-based management systems.
So why are billionaires selling Toast stock? The main issue with Toast right now is continued losses. Its net loss increased in the first quarter from $81 million last year to $83 million this year although that was due to restructuring actions. Free cash flow was a negative $33 million although that was an improvement from $65 million last year.
Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) have turned positive and are increasing, and management is expecting free cash flow to be positive for the remainder of the year. It also expects operating income (based on generally accepted accounting principles (GAAP) to break even by the end of the year.
NYSE: TOST
Key Data Points
Toast stock is up 9% over the past year and 26% so far this year. It's having a very hard time getting back to its previous highs, though, and it remains more than 60% off highs from 2021.
Right now, there's the risk that growth slows down before Toast becomes profitable, making it difficult to scale without increasing expenses. Many restaurants are reporting slow growth in this economy, and Toast's growth relies on restaurants investing in their own growth. If restaurants are feeling pressure, it will eventually trickle down to Toast's business as well.
Buying Toast now is a long-term bet that requires some patience. Hedge fund managers aren't always investing that way. They have different goals than the individual investor, and if they've achieved what they wanted to from Toast stock, or feel that it's not living up to their expectations right now, they might decide to pull out and move on.
Hedge funds aren't retail portfolios
This is why it isn't always the best strategy to follow hedge fund movements. Hedge fund managers have an obligation to report near-term gains and maximize their investors' funds every quarter. Many funds own thousands of stocks and frequently rebalance their makeup to reflect specific goals. Scion owns only 16 stocks right now, but Two Sigma owns more than 2,000 including alternative investment types.
For the long-term-oriented individual investor, Toast looks like a compelling buy, and I wouldn't worry too much about some billionaires selling it right now.
