There are very few industry sectors that can boast of continuous outperformance over the broader market in the last few years like the technology sector can. Not only is it among the best performing sectors this year, it has also consistently beaten the broader market since the start of 2013. While the S&P 500 (INDEXSP:.INX) has generated returns of approximately 49% in the 35 months since the beginning of 2015, the S&P North American Technology Sector Index (INDEXSP:SPGSTI) boasts returns of over 72% during the same period. Moreover, while the S&P 500 (INDEXSP:.INX) is trading almost flat year-to-date, the S&P North American Technology Sector Index (INDEXSP:SPGSTI) is up by over 10%.
Since technology has performed remarkably well compared to other sectors over the last three years, it is not surprising that it is also among the most-loved sectors for hedge funds to invest in. Research done by Insider Monkey shows that if a company is backed by a swell of funds, the chances of its stock outperforming the broader market increase significantly. Hence, in this article we will be revealing and discussing the five most popular tech stocks heading into the fourth quarter among the greater than 700 hedge funds that we cover.
#5 Yahoo! Inc. (NASDAQ:YHOO)
Investors with Long Positions (as of September 30): 89
Aggregate Value of Investors’ Holdings (as of September 30): $5.47 Billion
The continuous decline that Yahoo! Inc. (NASDAQ:YHOO)’s stock has suffered during 2015 has weighed heavily on its popularity among hedge funds. Not only did the number of hedge funds that were long Yahoo decline from 104 at the end of June, but the aggregate value of their Yahoo holdings also saw a noteworthy drop of $452 million during that time. Although the stock has recovered a little in the fourth quarter, it still trades down by 33.26% year-to-date. According to recent reports, Yahoo’s Board is planning a series of meetings this week to discuss whether to proceed with the spin-off of the stake it holds in Alibaba Group Holding Ltd (NYSE:BABA), sell its core Internet business, or do both. Interestingly, activist investor Jeffrey Smith‘s Starboard Value LP – which more than doubled its stake in the company during the third quarter to over 7.0 million shares – pushed heavily for the Alibaba-stake spin-off at the beginning of year, but has recently suggested that Yahoo halt the spin-off and focus on selling its core business instead.
#4 Microsoft Corporation (NASDAQ:MSFT)
Investors with Long Positions (as of September 30): 113
Aggregate Value of Investors’ Holdings (as of September 30): $19.31 Billion
Shares of Microsoft Corporation (NASDAQ:MSFT) are currently trading up by 18.88% year-to-date thanks majorly to the rally they have seen since the start of the fourth quarter. It seems hedge funds anticipated this move, as the number of hedge funds that were long Microsoft increased by six during the third quarter, while the aggregate value of their Microsoft holdings increased by almost $1 billion. On Monday, Microsoft announced that it would be laying off 60 employees working on its HoloLens Project in Israel. With ownership of over 75.0 million shares, Jeffrey Ubben‘s ValueAct Capital was the largest shareholder of the company at the end of September among the funds in our database.
We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10.0 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. the S&P 500’s 49% gain) over the last 38 months (see the details here).