Five Stocks Hedge Funds Are Piling Into

The hedge fund industry has been underperforming the broader market lately, following the losses registered by some hedge fund darlings like Valeant Pharmaceuticals Intl Inc (NYSE:VRX) or Sunedison Inc (OTCMKTS:SUNEQ). The Eurekahedge Hedge Fund Index registered gains of 4.53% in 2016, which though is better than the previous year’s return of 1.85%, is still lower than the S&P 500, which advanced by some 10%. However, this doesn’t mean that hedge funds are not worth following, since historically they have proven themselves to be great stock pickers, which is backed by our research.

We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively the most bullish on. Over the past year, this strategy generated returns of 39.7%, topping the 24.1% gain registered by S&P 500 ETFs. Insider Monkey’s enhanced small-cap strategy registered gains of more than 45% over the last 12 months and outperformed SPY by more than 30 percentage points in the last 4.5 years (see details here).

Every quarter we analyze the 13F filings posted by these investors and identify their collective sentiment towards thousands of stocks. This allows us to rank stocks based on their popularity and also identify patterns, like industries or sectors that saw an inflow or outflow of smart money during a particular quarter. For example, what we observed is that hedge funds expressed a particular interest towards financial stocks, especially big banks, like Bank of America Corp (NYSE:BAC), which saw a considerable increase in the number of bullish investors and was the third most popular stock at the end of 2016. On the other hand, some tech stocks like Amazon.com, Inc. (NASDAQ:AMZN) registered a drop in popularity.

With this in mind, let’s take a closer look at the five companies that were the most popular among the investors in our database heading into 2017.

After having been the most popular stock among hedge funds at the end of September, Amazon.com, Inc. (NASDAQ:AMZN) saw a significant drop in the number of bullish investors. More specifically, during the third quarter, the number of funds long the stock slid by 27 to 123, while the aggregate value of their holdings fell by 31% to $14.44 billion. The outflow of smart money came amid a 10% drop registered by Amazon’s stock during the fourth quarter, although it has recovered and is 14% in the green year-to-date. The decline can be attributed to the company missing the bottom line estimates in its third-quarter results posted at the end of October and the outcome of the election, which probably led to investors jumping into stocks that had been forecasted to do well under Trump presidency. Nevertheless, Amazon.com, Inc. (NASDAQ:AMZN) remains to be a good long-term investment as it continues to challenge brick-and-mortar retailers, has a solid cloud business and is making forays in the Internet of Things and delivery industries. Among the top shareholders of Amazon are billionaire Ken Fisher’s Fisher Asset Management, Andreas Halvorsen’s Viking Global, and Alex Snow’s Lansdowne Partners.

Microsoft Corporation (NASDAQ:MSFT) saw the number of funds long its stock unchanged at 26, while the total value of their holdings inched up by 3% to $18.77 billion. However, the stock gained 8% between October and December, which means that, overall, the company saw an outflow of hedge fund capital. Microsoft Corporation (NASDAQ:MSFT) has been generally reporting better-than-expected results for the past several quarters and shows strong performance of its cloud computing segment, Azure, which grew by 93% last quarter alone. Jeff Ubben‘s ValueAct Capital reported ownership of 38.63 million shares of Microsoft Corporation (NASDAQ:MSFT) as of the end of December.

As stated earlier, Bank of America Corp (NYSE:BAC) was the third most-popular stock among the funds tracked by us at the end of 2016. The number of investors betting on the stock jumped to 139 from 112, while the value of their holdings surged by 72% to $12.49 billion during the fourth quarter. A significant part of the increase in the aggregate value of holdings was played by the 40% jump registered by the stock. Bank of America’s shares rallied following the elections and received another boost after the Fed hiked the interest rates in December. Financial companies are expected to do well in the next couple of years due to further interest rate hikes promised by the Fed and because of tax rate cuts and cut regulations that are planned by the Trump administration. Among the investors that added Bank of America Corp (NYSE:BAC) to their equity portfolios during the fourth quarter are Clint Carlson‘s Carlson Capital, Charles Davidson‘s Wexford Capital, and Three Bays Capital, led by Matthew Sidman.

Both of Alphabet Inc (NASDAQ:GOOGL)’s Class A and Class C stocks ranked among the top five stocks, which makes the company the most popular, even though the stocks ranked on the second and fourth places, respectively. A total of 139 funds tracked by us held around $14.62 billion worth of class A stock and 126 funds amassed $12.49 billion worth of class C shares. During the fourth quarter, the number of funds long class A stock advanced by two, while the number of investors holding class C shares declined by eight. The aggregate values of their positions declined by 1% and 10% over the quarter, respectively. Alphabet Inc (NASDAQ:GOOGL)’s, the leader in online advertising, which constitutes its core business, is also engaged in a number of other projects, one of which is Waymo, a recently formed company that develops self-driving technology. Waymo has been in the spotlight recently over a lawsuit against Otto, a self-driving trucking company, and Uber, which has acquired it, in which Waymo claims that they have stolen its design for LiDAR. Otto was co-founded by former Waymo employee, Anthony Levandowski, and Waymo claims that Mr. Levandowski downloaded confidential filed and trade secrets. Viking Global, Fisher Asset Management, Dan Loeb‘s Third Point, and Philippe Laffont’s Coatue Management owned substantial positions in Alphabet Inc (NASDAQ:GOOGL)’s’s both class A and Class C stocks heading into 2017.

Finally, Facebook Inc (NASDAQ:FB) climbed one spot and became the most popular company among the investors tracked by us at the end of 2016, replacing Amazon, as it registered a smaller drop in the number of bullish investors than the eCommerce giant. The number of investors long Facebook Inc (NASDAQ:FB) fell by three to 146 between October and December, while the aggregate value of their positions dropped by 24% to $12.42 billion. Among these funds, Viking Global held the largest stake, which contained 18.98 million shares, according to its latest 13F filing. Owning the largest social media platform in the world, Facebook is currently trying to find ways to monetize its Messenger platform. According to The Information, Facebook Inc (NASDAQ:FB) is currently attempting to include commerce buttons in Messenger, which would allow users to buy tickets, order food, or perform other activities, when they chat about them.

Disclosure: None