In this article we discuss the 13 stocks that best performing hedge funds are piling into.
Hedge funds have been one of the most successful earning vehicles in the finance world over the past few decades, averaging record returns for investors that are not easy to match. Evidence of this stellar performance is indicative in the whopping $63.5 billion that the twenty best performing hedge funds made for their clients in 2020, a volatile year for the stock market that saw massive sell-offs and record tech-driven growth rallies.
According to data released by London-based LCH Investments, more than half of the $127 billion that hedge funds made last year was earned by the most successful managers that included Chase Coleman from Tiger Global Management LLC, Israel Englander from Millennium Management, Stephen Mandel from Lone Pine Capital, Andreas Halvorsen from Viking Global, and Ken Griffin from Citadel Investment Group. Bridgewater Associates, led by Ray Dalio, was the top performer of the year, earning more than $46 billion in 2020.
These funds focused on energy, basic materials, and technology growth stocks to drive their earnings, according to Chicago-based Hedge Fund Research. There are many lessons that retail investors, who are increasingly shaping the market dynamics this year, can learn from the performance of hedge funds. By replicating the top holdings from the best performing funds, there is a good chance of making a great deal of money in a short space of time. After all, hedge funds set a 10-year earnings record in the pandemic-ravaged 2020.
According to research done by Insider Monkey, the stocks that the top 100 hedge funds are piling into this year include Sea Limited (NYSE: SE), the Singapore-based holding company that owns ecommerce platform Shopee, General Motors Company (NYSE: GM), the Michigan-based carmaker, and Twitter, Inc. (NYSE: TWTR), the California-based social networking platform. Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR) are all backed by more than 10 of the 20 best performing hedge funds.
The hedge fund replication strategy is effective because hedge funds usually offer their services to very rich individuals, pension plans, insurance companies, universities, and other institutional clients. They also charge abnormally high fees, sometimes 2% of assets under management and 20% of gains, that the average investor cannot afford to pay. This disconnect between the hedge funds and the wider industry has stoked market volatility in recent weeks, with social media acting as a catalyst for change in this regard.
This tech-enabled disruption has pummeled entire investment portfolios in the past few years. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Photo by Austin Distel on Unsplash
Our Methodology
Insider Monkey tracks over 886 hedge funds. Out of these, we analyzed the data of the top 100 hedge funds and listed 13 stocks that these best-performing hedge funds are paying attention to.
With this context in mind, here is our list of the 13 stocks that best performing hedge funds are piling into.
Stocks That Best Performing Hedge Funds Are Piling Into
13. Zillow Group, Inc. (NASDAQ: Z)
Number of Hedge Fund Holders: 82
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 8
Zillow Group, Inc. (NASDAQ: Z) is a Washington-based real estate company that operates through a popular internet platform. It was founded in 2004 and is ranked thirteenth on our list of 13 stocks that best performing hedge funds are piling into. Zillow stock has offered investors returns exceeding 81% in the past twelve months. Zillow also offers insurance services. According to Insider Monkey calculations, eight hedge funds, with stakes worth $286 million, out of the 100 best performing ones are bullish on Zillow Group.
On May 4, Zillow Group, Inc. (NASDAQ: Z) posted quarterly earnings results, reporting earnings per share of $0.20 for the first three months of 2021, beating market predictions by $0.13. The revenue over the period was $1.22 billion, up 8% year-on-year.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm SRS Investment Management is a leading shareholder in Zillow Group, Inc. (NASDAQ: Z) with 7.3 million shares worth more than $946 million.
Just like Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR), Zillow Group, Inc. (NASDAQ: Z) is one of the stocks that best performing hedge funds are piling into.
In its Q1 2021 investor letter, Baron Funds, an asset management firm, highlighted a few stocks and Zillow Group, Inc. (NASDAQ: Z) was one of them. Here is what the fund said:
“Zillow Group, Inc. operates leading U.S. real estate sites, a mortgage marketplace, and the Zillow Offers home-buying business. Shares fell during the quarter in concert with the broader rotation out of technology-based stocks despite the company’s continued inflection in mortgages revenue, strong profitability in its core business, and a positive real estate outlook as Zillow builds out its iBuying ecosystem. In our view, Zillow is a leader in the large online real estate advertising market with substantial upside from mortgages and Offers, and we remain investors.”
12. IAC/InterActiveCorp (NASDAQ: IAC)
Number of Hedge Fund Holders: 63
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 8
IAC/InterActiveCorp (NASDAQ: IAC) is a New York-based holding company that owns media and internet brands. It was founded in 1995 and is placed twelfth on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 22% to investors over the course of the past year. The firm owns brands in more than 100 countries across the world. According to Insider Monkey calculations, eight hedge funds out of the 100 best performing ones are bullish on InterActiveCorp. The total worth of their stakes is $486 million, of the
IAC/InterActiveCorp (NASDAQ: IAC) posted quarterly earnings results on May 5, reporting earnings per share of $3.46, beating market predictions by $4.07. The revenue over the period was $876 million, down 28% year-on-year.
At the end of the first quarter of 2021, 63 hedge funds in the database of Insider Monkey held stakes worth $2.1 billion in IAC/InterActiveCorp (NASDAQ: IAC), down from 67 the preceding quarter worth $2.2 billion.
In its Q4 2020 investor letter, Alphyn Capital Management, an investment management firm, highlighted a few stocks and IAC/InterActiveCorp (NASDAQ: IAC) was one of them. Here is what the fund said:
“On November 22nd, IAC announced it would look into spinning out Vimeo, its Software-As-A-Service video creation company, on the back of strong revenue growth and robust investor interest. To quote from the IAC shareholder letter “We just tested Vimeo’s ability to access capital with a small private fundraise to bolster Vimeo’s balance sheet and to repay capital to IAC. We entered into agreements today to raise $150 million of equity capital at Vimeo from outside investors at an implied enterprise value of $2.75 billion, a large multiple of current revenue. We don’t normally think in terms of revenue multiples, but we found real appetite among investors who do – we had more interest in Vimeo than the number of shares we were willing to let Vimeo sell.” In other words, IAC will exploit current valuations while the market is willing to pay for it. This has so far been a good example of our defensive approach towards investing software companies from the cover of an undervalued holding company run by intelligent capital allocators.”
11. Facebook, Inc. (NASDAQ: FB)
Number of Hedge Fund Holders: 257
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 8
Facebook, Inc. (NASDAQ: FB) is a California-based technology company founded in 2004. It is ranked eleventh on our list of 13 stocks that best performing hedge funds are piling into. The stock has offered investors returns exceeding 45% over the past year. Facebook owns several social platforms, including Instagram and WhatsApp. It is one of the largest technology companies in the world in terms of market capitalization. According to Insider Monkey calculations, eight hedge funds, with stakes worth $435 million, out of the 100 best performing ones are bullish on Facebook.
Facebook, Inc. (NASDAQ: FB) posted quarterly earnings results on April 28, reporting earnings per share of $3.30 for the first quarter of 2021, beating market predictions by $0.96. The revenue for the first three months of 2021 was over $26 billion, up 47% year-on-year.
At the end of the first quarter of 2021, 257 hedge funds in the database of Insider Monkey held stakes worth $40 billion in Facebook, Inc. (NASDAQ: FB), up from 242 in the preceding quarter worth $38 billion.
Just like Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR), Facebook, Inc. (NASDAQ: FB) is one of the stocks that best performing hedge funds are piling into.
In its Q1 2021 investor letter, Distillate Capital, an investment management firm, highlighted a few stocks and Facebook, Inc. (NASDAQ: FB) was one of them. Here is what the fund said:
“Facebook has come in and out of the portfolio before and did so this quarter on the back of substantial improvement in projected free cash flows such that its valuation now meets the criteria for inclusion.”
10. Citigroup Inc. (NYSE: C)
Number of Hedge Fund Holders: 90
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 8
Citigroup Inc. (NYSE: C) is a New York-based investment bank and financial services company founded in 2012. It is placed tenth on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 43% to investors in the past twelve months. The bank has more than 2,300 branches across the world, mostly in North America and Asia. According to Insider Monkey calculations, eight hedge funds, with stakes worth $405 million, out of the 100 best performing ones are bullish on Citigroup.
On April 15, Citigroup Inc. (NYSE: C) posted quarterly earnings results, reporting earnings per share of $3.62 for the first quarter of 2021, beating market estimates by $1.03. The revenue over the period was more than $19 billion, beating market predictions by $430 million.
At the end of the first quarter of 2021, 90 hedge funds in the database of Insider Monkey held stakes worth $6.9 billion in Citigroup Inc. (NYSE: C), down from 95 the preceding quarter worth $7.1 billion.
Just like Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR), Citigroup Inc. (NYSE: C) is one of the stocks that best performing hedge funds are piling into.
9. Amazon.com, Inc. (NASDAQ: AMZN)
Number of Hedge Fund Holders: 243
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 8
Amazon.com, Inc. (NASDAQ: AMZN) is a Washington-based technology company founded in 1994. It is ranked ninth on our list of 13 stocks that best performing hedge funds are piling into. The stock has offered investors returns exceeding 31% over the past year. Amazon has stakes in several businesses in addition to the core ecommerce platform it operates, including web services and a streaming platform. According to Insider Monkey calculations, eight hedge funds, with stakes worth $458 million, out of the 100 best performing ones are bullish on Amazon.
On May 3, investment advisory Wells Fargo picked Amazon.com, Inc. (NASDAQ: AMZN) stock as a signature pick with a price target of $4,500. The technology company also reported a few weeks ago that the video streaming platform it owned broadcast advertising to 120 million users per month.
Out of the hedge funds being tracked by Insider Monkey, Chicago-based investment firm Citadel Investment Group is a leading shareholder in the firm with 3.3 million shares worth more than $10.5 billion.
Just like Uber Technologies, Inc. (NYSE: UBER), Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR), Amazon.com, Inc. (NASDAQ: AMZN) is one of the stocks that best performing hedge funds are piling into.
In its Q1 2021 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Amazon.com, Inc. (NASDAQ: AMZN) was one of them. Here is what the fund said:
“Amazon (AMZN): We sold our last remaining stake in Amazon this quarter. Amazon was our longest-running investment holding, after having originally purchasing it at the inception of Hayden in 2014, at a price of ~$317.
I gave some details of how Amazon has progressed over these past 6.5 years in last year’s Q2 2020 letter, which partners can find here (LINK). The company has executed amazingly well over this tenure, with revenues up ~3.3x and since our initial purchase, and reported operating income up ~30x over that period.
Generally, I believe there are three reasons to sell an investment: 1) we recognize our initial thesis is wrong (sell out as quick as possible), 2) we have a significantly higher returning opportunity to redeploy the capital into (sell-down to fund the new investment), or 3) the company is maturing and hitting the top part of it’s S-curve / business lifecycle, so the business has fewer places to reinvest its capital internally. As such, the future returns will likely be lower than the past. This investment thus becomes a “source of capital” in the future, as we fund earlier-stage investment opportunities.
In the case of Amazon, we decided to sell due to the third scenario. I’m sure Amazon will continue to generate value for shareholders and continue to keep pace with the broader technology sector. However, I’m just not confident it’s as attractive an investment as when we first invested.
With ~51% of US households having an Amazon Prime account (and with very low churn), each of these households continuing to increase their annual spend with Amazon, and few / no real competitors in sight, Amazon is a dominant force that will only continue to accrue value as consumers continue to move from offline to online purchases for their everyday needs. Likewise, the “cash-flow machine” of Amazon Web Services is in a similar position of strength, with AWS now having ~32% market share and continuing to grow at +30% y/y. Because of this, I think Amazon is probably one of the safest investments in the technology sector today.
So why did we decide to sell the investment then? Simply put, Amazon is in a much different place than when we initially invested. Back in 2014, investors were starting to question whether Amazon’s promise of future earnings potential would actually come to fruition.
Operating income had declined from ~$1.4BN in 2010, to ~$676M in 2012, to just ~$178M by the end of 2014. Expenses were outpacing revenue growth, and investors were questioning whether Amazon’s expenses were truly “investments” as they claimed, or whether it was a structural necessity of the business and thus would never flow to investor’s bottom line.
The critical question was ‘what portion of expenses are truly growth investments vs. structural expenses, and as a result, will Amazon ever be capable of generating significant profits?’
Our analysis indicated that these expenditures truly were the former, and led to the belief that the business’ structural margins would inevitably increase over time. This was our differentiated insight / investment edge.
Fast-forward to today, and our thesis proved correct with operating margins having increased from ~0.2% to ~6%. However due to this success and proving this facet out to investors, Amazon investors have much higher confidence and a better understanding of the company today. I’m not sure we have the same level of differentiated insights, as we did back then.
In addition, I believe the departure of Jeff Bezos and his long-time lieutenants signal a regime change. Perhaps it’s now “Day 1.5” instead of the Day 1 mentality that made Amazon so successful (LINK)… The departures within the past couple years include:
- Jeff Bezos – Founder, CEO, Visionary. Started Amazon in 1994.
- Jeff Blackburn – Joined Amazon in 1998. Oversaw Amazon Marketplace, Advertising, Amazon Studios, Prime Video, Prime Music, M&A.
- Jeff Wilke – Joined Amazon in 1999. Oversaw Amazon Consumer (ecommerce) business.
- Steve Kessel – Joined Amazon in 1999. Oversaw Physical Stores, Kindle, and Whole Foods.
Blackburn, Wilke, and Kessel have each arguably created hundreds of billions of shareholder value. On top of this, Bezos is the visionary and culture-setter behind Amazon. When he and his long-time lieutenants take their hands off the wheel, it is probably time for us to as well.
We sold our remaining shares at an average price of ~$3,240. Based on our initial investment, we made a ~10x return in a little over six years, for a ~45% IRR7. We reinvested the proceeds into our existing portfolio, taking advantage of the prices offered by this latest market draw-down.”
8. Adient plc (NYSE: ADNT)
Number of Hedge Fund Holders: 39
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 8
Adient plc (NYSE: ADNT) is an Ireland-based company that makes and sells different car components. It is placed eighth on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 157% to investors over the course of the past twelve months. According to Insider Monkey calculations, eight hedge funds, with stakes worth $376 million, out of the 100 best performing ones are bullish on Adient. Some of the products the firm markets for cars and other vehicles include frames, mechanisms, foams, head restraints, armrests, and trim covers.
In quarterly earnings results posted on May 8, Adient plc (NYSE: ADNT) reported earnings per share of $1.15 for the first three months of 2021, beating market predictions by $0.60. The revenue over the period was $3.82 billion, up 8.8% year-on-year.
At the end of the first quarter of 2021, 39 hedge funds in the database of Insider Monkey held stakes worth $754 million in Adient plc (NYSE: ADNT), up from 37 in the previous quarter worth $650 million.
Just like Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR), Adient plc (NYSE: ADNT) is one of the stocks that best performing hedge funds are piling into.
Greenlight Capital, in its Q2 2020 investor letter, mentioned Adient plc (NYSE: ADNT). Here is what the fund has to say in its letter:
“We exited a position in Adient with a 50% loss over two years. The management was well on its way to executing a successful turnaround when COVID-19 hit. The unexpected macro event has clearly impaired the near-term opportunity, so we exited.”
7. Uber Technologies, Inc. (NYSE: UBER)
Number of Hedge Fund Holders: 130
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 9
Uber Technologies, Inc. (NYSE: UBER) is a California-based technology firm founded in 2009 that operates a ride-hailing business but has stakes in the food delivery sector as well. It is ranked seventh on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 39% to investors over the past twelve months. According to Insider Monkey calculations, nine hedge funds, with stakes worth $456 million, out of the 100 best performing ones are bullish on Uber Technologies.
On May 5, Uber Technologies, Inc. (NYSE: UBER) posted quarterly earnings results, reporting earnings per share of -$0.06 for the first three months of 2021, beating market expectations by $0.49. The revenue over the period was $2.9 billion, down 10.8% year-on-year.
Out of the hedge funds being tracked by Insider Monkey, California-based investment firm Altimeter Capital Management is a leading shareholder in the firm with 28 million shares worth more than $1.5 billion.
Just like Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR), Uber Technologies, Inc. (NYSE: UBER) is one of the stocks that best performing hedge funds are piling into.
RiverPark Advisors, LLC, in its Q4 2020 investor letter, mentioned Uber Technologies, Inc. (NYSE: UBER). Here is what the fund has to say in its letter:
“UBER was also a strong contributor, as shares rallied following the approval of California’s Proposition 22 by voters, allowing the company’s California-based drivers to remain independent contractors (rather than become more expensive employees). We believe this news is not just about the 10%-15% of Uber’s revenue tied to California, but the influence this will have on other states reassessing driver pay. UBER also reported strong third quarter results with Delivery Gross Bookings growing 135% year-over-year which nearly fully offset a reduction in Mobility Gross Bookings, which were down 50% year over year. Total Gross Bookings for the quarter were down only 10% year over year as compared with down 35% last quarter.
Despite the COVID disruption, UBER remains the undisputed global leader in ride sharing (44% of the Company’s third quarter revenue), with greater than 50% share in every major region in which it operates. The company is also a leader in food delivery (46% of revenue), where it is number one or two in the more than 25 countries in which it operates. We view UBER as more than just ride sharing and food delivery, but also as a global mobility platform with the ability to sell to its more than 100 million users (by comparison, Amazon Prime has 130+ million members) and penetrate new markets of on-demand services, such as grocery delivery, truck brokerage and worker staffing for shift work. At its current $96 billion market capitalization, UBER trades at only 6x next year’s revenue from its two core businesses. Additionally, the company has substantial, seemingly unrecognized, value in its several nascent development businesses and another $12 billion in equity stakes in synergistic businesses around the world.”
6. MercadoLibre, Inc. (NASDAQ: MELI)
Number of Hedge Fund Holders: 69
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 9
MercadoLibre, Inc. (NASDAQ: MELI) is an Argentina-based company that operates online marketplaces. It was founded in 1999 and is placed sixth on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 62% to investors over the past twelve months. According to Insider Monkey calculations, nine hedge funds, with stakes worth $436 million, out of the 100 best performing ones are bullish on MercadoLibre.
In quarterly earnings results posted on May 5, MercadoLibre, Inc. (NASDAQ: MELI) reported earnings per share of -$0.68 for the first three months of 2021, missing market predictions of $0.63. The revenue over the period was $1.38 billion, up 111% year-on-year.
At the end of the first quarter of 2021, 69 hedge funds in the database of Insider Monkey held stakes worth $5.2 billion in MercadoLibre, Inc. (NASDAQ: MELI), down from 79 in the previous quarter worth $8.7 billion.
Just like Sea Limited (NYSE: SE), General Motors Company (NYSE: GM), and Twitter, Inc. (NYSE: TWTR), MercadoLibre, Inc. (NASDAQ: MELI) is one of the stocks that best performing hedge funds are piling into.
Baron Funds, in its Q1 2021 investor letter, mentioned MercadoLibre, Inc. (NASDAQ: MELI). Here is what the fund has to say in its letter:
“MercadoLibre, Inc., a Latin American e-commerce and FinTech platform, declined in the quarter despite reporting very strong fourth quarter results. MercadoLibre falls into a category of businesses that were net beneficiaries of last year’s lockdowns and reduced consumer gatherings that fell out of favor this quarter as investors looked toward economic reopening and normalization. We are confident in MercadoLibre’s ability to create substantial long-term value as it grows into a regional powerhouse across e-commerce and financial services.”
5. Wells Fargo & Company (NYSE: WFC)
Number of Hedge Fund Holders: 96
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 10
Wells Fargo & Company (NYSE: WFC) is a California-based financial services company founded in 1852. It is ranked fifth on our list of 13 stocks that best performing hedge funds are piling into. The stock has offered investors returns exceeding 54% in the past twelve months. According to Insider Monkey calculations, ten hedge funds out of the 100 best performing ones are bullish on Wells Fargo. It is one of the largest banks in the world with close to $2 trillion in assets and equity under management.
On May 19, investment advisory UBS downgraded Wells Fargo & Company (NYSE: WFC) stock to Neutral with a revised target of $47 from $40. The share price of the investment bank dipped over 1.3% in premarket trading after the ratings update.
At the end of the first quarter of 2021, 96 hedge funds in the database of Insider Monkey held stakes worth $7.4 billion in Wells Fargo & Company (NYSE: WFC), down from 99 in the preceding quarter worth $8.7 billion.
RGA Investment Advisors, in its Q4 2020 investor letter, mentioned Wells Fargo & Company (NYSE: WFC). Here is what the fund has to say in its letter:
“Detractors to performance relative to the index include financial services holdings such as Wells Fargo. While banks in general have suffered due to the recession and experienced credit losses, Wells Fargo also suffered from operational missteps. It is our expectation, however, that our bank holdings in general will benefit from stronger economic growth as the pandemic recedes; and we believe Wells Fargo in particular, will, over time, lower their costs and successfully grow their businesses.”
4. Twitter, Inc. (NYSE: TWTR)
Number of Hedge Fund Holders: 107
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 11
Twitter, Inc. (NYSE: TWTR) is a California-based social networking platform founded in 2006. It is placed fourth on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 69% to investors over the course of the past twelve months. According to Insider Monkey calculations, eleven hedge funds out of the 100 best performing ones are bullish on Twitter.
On April 29, Twitter, Inc. (NYSE: TWTR) posted quarterly earnings results, reporting earnings per share of $0.16 for the first three months of 2021, beating market expectations by $0.02. The revenue over the period was more than $1 billion, up 28% year-on-year.
At the end of the first quarter of 2021, 107 hedge funds in the database of Insider Monkey held stakes worth $4.5 billion in Twitter, Inc. (NYSE: TWTR), up from 78 in the preceding quarter worth $2.7 billion.
RGA Investment Advisors, in its Q1 2021 investor letter, mentioned Twitter, Inc. (NYSE: TWTR). Here is what the fund has to say in its letter:
“‘The bird has wings’—Twitter’s quarter started off somewhat ominously, with Twitter the worst performing stock in the S&P 500 following the January 6th insurrection and questions about the stickiness of the userbase after permanently suspending the account of President Trump.8 By the end of the quarter, Twitter was one of the best performers in the index after exceptionally strong fourth quarter earnings and guidance for the year and an upbeat analyst day that highlighted a rapidly evolving product roadmap placing the timeline at the center of ephemeral (fleets), long form (Revue) and voice (Spaces). The improvements to the experience makes the platform more accessible and provides more opportunity to continue growing the userbase. Importantly, Twitter also embraced what we have been calling “creative empowerment” in previewing SuperFollows and a host of features designed to help content creators and contributors monetize their own audience on Twitter itself. These developments, alongside considerable progress on the advertising platform give us growing conviction that Twitter will deliver on its largely untapped opportunity—in other words, the value creation opportunity on top of the low multiple we were able to build our position at. Elliot spoke at length about these developments on Yet Another Value Podcast with Andrew Walker and The Business Brew with Bill Brewster, which we invite you to check out.”
3. General Motors Company (NYSE: GM)
Number of hedge fund holders: 86
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 11
General Motors Company (NYSE: GM) is a Michigan-based carmaker founded in 1908. It is ranked third on our list of 13 stocks that best performing hedge funds are piling into. The stock has offered investors returns exceeding 104% over the course of the past twelve months. According to Insider Monkey calculations, eleven hedge funds out of the 100 best performing ones are bullish on General Motors. Some of the products the firm markets include cars, trucks, crossovers, and automobile parts.
On May 5, General Motors Company (NYSE: GM) announced quarterly earnings results, posting earnings per share of $2.25 for the first three months of 2021, beating market predictions by $1.20. The revenue for the first quarter of 2021 was $32.4 billion, down 0.7% year-on-year.
Out of the hedge funds being tracked by Insider Monkey, Nebraska-based investment firm Berkshire Hathaway is a leading shareholder in the firm with 67 million shares worth more than $3.8 billion.
Junto Investments, in its Q4 2020 investor letter, mentioned General Motors Company (NYSE: GM). Here is what the fund has to say in its letter:
“General Motors was the biggest gainer. We managed to buy it at a screamingly cheap price in the middle of March. A lot of interesting news has emerged about GM recently, including the new electric product delivery system BrightDrop and GM Cruise’s team-up with Microsoft Azure to commercialize self-driving cars in 2021. GM’s intrinsic value is crystallizing and the company is worth a whole lot more than is still reflected in the market.”
2. Carvana Co. (NYSE: CVNA)
Number of hedge fund holders: 64
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 12
Carvana Co. (NYSE: CVNA) is an Arizona-based online used car retailer founded in 2012. It is placed second on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 173% to investors over the past year. According to Insider Monkey calculations, twelve hedge funds out of the 100 best performing ones are bullish on Carvana. The firm offers users the ability to research, analyze through imaging technology, purchase, and schedule cars for delivery through their platform.
Carvana Co. (NYSE: CVNA) posted earnings results for the first quarter of 2021 on May 5, reporting earnings per share of -$0.46, beating market estimates by $0.21. The revenue over the period was $2.25 billion, up 104% year-on-year.
At the end of the first quarter of 2021, 64 hedge funds in the database of Insider Monkey held stakes worth $7.5 billion in Carvana Co. (NYSE: CVNA), up from 63 in the preceding quarter worth $7 billion.
In its Q1 2021 investor letter, Steel City Capital LP, an asset management firm, highlighted a few stocks and Carvana Co. (NYSE: CVNA) was one of them. Here is what the fund said:
“Carvana’s (CVNA) 4Q’20 results weren’t particularly great. EBITDA was negative ($70) million, a stark turnaround on a sequential basis from a first-ever EBITDA profit of $21 million in 3Q’20. The culprit was a steep drop off in retail unit GPU ($1,265 vs. $1,857) and wholesale unit GPU ($358 vs. $1,113) as some of the COVID-driven aberrations in the used car market began to abate.
The company’s presentation of EBITDA (calculated “bottom up”) is dubious, as it commingles non-operating items including mark-to-market changes in its retained securitization portfolio. With the exception of 1Q’20, when ABS markets were going haywire, this line item provided a tailwind throughout 2020, including a gain of $5 million in 4Q’20. Also on the non-operating self-help front, management released a reserve for vehicle service contract cancellations in 4Q’20, adding another $7 million to EBITDA, and boosting “Other” GPU by $96.
Putting it all together, I put operating EBITDA closer to negative ($82) million vs. the $70 million printed by the company. This is a larger loss than 4Q’19 (calculated on a similar operating basis) despite the company selling 43% more retail units y/y!
Management didn’t provide formal guidance for 2021, but did offer guardrails for how to think about the year. Retail unit growth is expected to accelerate from last year’s 37%, with total revenue tracking in-line with retail unit growth. Total revenue per retail unit was $22,885 last year, meaning the company thinks it can hold this metric relatively flat throughout the year. Management also noted it expects some softening in retail ASPs throughout the year (“I think the gains that we saw in ASP in the back half of the year, we expect to moderate a little bit in 20216 “), with the implication being “Other” revenue – including financing – will serve as an offset.
Why look at total revenue per retail unit? The company guides to total GPU, which itself is an apples-and-oranges mix of total gross profit divided by only retail units. As for total GPU, management called out expectations for “mid- $3,000s” in FY21. Putting the pieces together, $3,500 of total GPU divided by $22,885 of total revenue per retail unit implies gross margin of 15.3% for the year, roughly 100 bps of pickup vs. last year’s 14.2%.
On the EBITDA front, management guided to continuing cost leverage but still a “small EBITDA margin loss” in FY’21. Splitting the difference between last year’s negative 4.6% EBITDA margin and breakeven gives us something in the realm of a 2.5% EBITDA margin loss for FY’21. So, 200 bps of total improvement, 100 bps of which we know is coming from GPU margin. The other 100 bps, therefore, must come from SG&A.
Applying a negative 2.5% margin to $22,885 of total revenue per retail unit implies about $575 of negative EBITDA per unit sold. This also allows us to back into implied cash SG&A per unit of $4,075, which is 17.8%, and 100 bps better than last year’s 18.8%.
The unknown variable is what retail unit growth actually looks like in 2021. All we know is it’s going to “accelerate” vs. last year’s 37%. Doing some back of the envelope sensitivity implies negative EBITDA ranging from a ($210) million loss at 50% unit growth to a ($250) million loss at 80% growth (A classic case of “We lose money on every sale but make up for it in volume!”). For context, the street is currently forecasting a negative EBITDA margin of 1.0% and negative EBITDA of ($87.5) million.
I think one of the big risks to the company’s outlook isn’t necessarily on the volume front – I believe management when they say they can’t keep pace with demand – but instead on the GPU front. Before 2H’20, only once in the prior 14 quarters did total GPU exceed $3,000. 3Q’20 reached an all-time high due to strong vehicle pricing and strong finance gross profit, while 4Q’20 got its boost from finance gross profit and the abovementioned reserve release. Finance GPU is a function of both absolute interest rates and ABS spreads, and the trajectory of absolute rates since the beginning of 2021 calls into question the company’s ability to maintain finance GPU at $1,400, let alone grow it.”
1. Sea Limited (NYSE: SE)
Number of Hedge Fund Holders: 98
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 14
Sea Limited (NYSE: SE) is a Singapore-based holding company that owns and runs popular ecommerce platform Shopee. It was founded in 2009 It is ranked first on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 202% to investors over the past year. Sea has stakes in the digital entertainment and financial services businesses as well. According to Insider Monkey calculations, fourteen hedge funds out of the 100 best performing ones are bullish on Sea.
Sea Limited (NYSE: SE) posted quarterly earnings in late April, reporting earnings per share of -$0.62, missing market estimates by $0.07. The revenue for the first quarter of 2021 was $1.8 billion, up 146% year-on-year.
At the end of the first quarter of 2021, 98 hedge funds in the database of Insider Monkey held stakes worth $10.4 billion in Sea Limited (NYSE: SE), down from 115 the preceding quarter worth $10.8 billion.
In its Q4 2020 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Sea Limited (NYSE: SE) was one of them. Here is what the fund said:
“Sea Ltd (SE): When I wrote our Q4 2019 letter about Shopee launching a Brazilian business, it seemed very few investors or competitors knew or cared.
A year ago, I wrote: “This is the first test for the ecommerce marketplace outside of its Southeast Asia home base. Will the platform’s fun and addicting features overcome a lack of local knowledge and presence? It’s hard to predict consumer behavior and how accepting users will be to a platform – especially one that’s a foreign culture and 10,000 miles away. The only way to know is to experiment and watch the results closely.
Empirically though, it seems that what consumers find entertaining in Asia, generally translates well to Brazil (and Shopee really is as much an entertainment platform, as an ecommerce one).
For example, just look at the top 10 free apps in Brazil. Two are utility messaging apps, so we’ll ignore those (WhatsApp and
Facebook Messenger). But among the remaining eight apps, they’re all entertainment based and overwhelmingly Asian. Four are from China (Kwai, TikTok, VStatus, TikTok Lite), two from Singapore (Free Fire and Shopee, both Sea Ltd apps), and one from the US (Instagram). The commonality is that all these apps are experts at creating addictive habits, as evidenced by their personalized recommendations, avg usage time, number of logins per day per user, etc.” (LINK)
I distinctly remember having conversations with several Brazilian hedge funds as recently as last summer who were investors in Sea Ltd. When the topic of Brazil came up, many of them didn’t even know Shopee was operating in their own backyard!
Part of this stems from the fact that Shopee tends to enter markets with a bottoms-up approach. Instead of going after urban, high disposable income users first (of which these hedge fund professionals were certainly part of), they tend to initially go after those with only a few hundred or thousand USD of annual disposable income. These users tend to reside outside of major cities, have fewer choices for recreational pastime (thus turning to gaming, short-form videos, or online shopping for entertainment), can’t afford “branded” items and thus are willing to take a chance on cheaper (but still good quality) un-branded goods, and are willing to wait several weeks for it to be shipped from Asian factories.
Anyone who has studied Pinduoduo (Nasdaq: PDD) in China, will recognize this strategy and just how large of a market these consumers can be. As Shopee gains popularity in a market, they will then start to slowly move “up-market”, and cater to more urban and higher-income consumers. They’ve already followed this exact strategy in Southeast Asia, and this is the point they’ve reached in Brazil over the past year.
Shopee made its first big social push last fall, hiring over a dozen influencers with 1M+ followers to promote Shopee’s Black Friday sale (LINK). In addition, they also released their first Brazilian TV commercial last year.
It seems these initiatives are working. Shopee now consistently ranks in Brazil’s top 5 apps (while sister app Free Fire, is also the #1 grossing app). In addition, Shopee also moved Pine Kyaw (LINK), one of their key lieutenants in Vietnam who successfully helped Shopee fight off competitors (Tiki, Lazada, Sendo), to Brazil last May.
For the past year, the company has insisted publicly that the Brazil initiative is still a “test” initiated by the cross-border team. While this may have been true at first, it’s clear this is no longer a “test”, but rather a strategic focus for Shopee and posed to be the next battleground. It’s likely the company has chosen to remain tight-lipped so as to not tip off competitors, while they quietly “position the troops” to prepare for a larger assault.
For example, Shopee is also starting to allow local sellers to join the platform and list their local inventory (LINK). By definition, this is no longer a cross-border initiative (i.e. allowing their Southeast Asian sellers to sell to Brazilian consumers, and then shipping the goods directly from Asia. This is the model Aliexpress follows.).
This is the start of a localized marketplace. And similar to their early days in Southeast Asia, the goal is to reach the “tipping point” at which the marketplace becomes self-sustainable (this concept is discussed in our Q1 2019 letter; LINK). The weapons of choice in reaching critical mass: social media influencers to drive rust & awareness, free shipping & discounts to acquire / convert these new customers, and gamification of shopping to drive continued engagement, habit building, and repeat purchases.
Given all of this, and the strong (but early) traction in the local Shopee Brazil marketplace, investors need to keep an eye on this development. It is the smallest GMV contribution among Shopee’s countries currently, but a large inherent call option in the valuation. Something that so far, seems greatly underappreciated. I suspect at some point in the near future, Shopee’s management team will disclose more on the initiative, and at which point investors will be surprised by how Shopee managed to quietly build one of the largest marketplaces in Brazil.”
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