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2019 Review: Most Favored Hedge Fund Stocks vs. Smartsheet Inc. (SMAR)

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Smartsheet Inc. (NYSE:SMAR) and see how the stock performed in comparison to hedge funds’ consensus picks.

Is Smartsheet Inc. (NYSE:SMAR) a splendid investment today? Hedge funds are turning less bullish. The number of long hedge fund positions were cut by 1 recently. Our calculations also showed that SMAR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Colin Moran Abdiel Capital

Colin Moran of Abdiel Capital Advisors

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to go over the recent hedge fund action surrounding Smartsheet Inc. (NYSE:SMAR).

What does smart money think about Smartsheet Inc. (NYSE:SMAR)?

Heading into the fourth quarter of 2019, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SMAR over the last 17 quarters. With the smart money’s sentiment swirling, there exists a few key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Among these funds, Whale Rock Capital Management held the most valuable stake in Smartsheet Inc. (NYSE:SMAR), which was worth $201.6 million at the end of the third quarter. On the second spot was Tiger Global Management which amassed $159.2 million worth of shares. 12 West Capital Management, Abdiel Capital Advisors, and Alkeon Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position ThornTree Capital Partners allocated the biggest weight to Smartsheet Inc. (NYSE:SMAR), around 8.47% of its 13F portfolio. 12 West Capital Management is also relatively very bullish on the stock, earmarking 7.73 percent of its 13F equity portfolio to SMAR.

Seeing as Smartsheet Inc. (NYSE:SMAR) has faced a decline in interest from hedge fund managers, it’s safe to say that there is a sect of fund managers who were dropping their entire stakes in the third quarter. Interestingly, Glen Kacher’s Light Street Capital said goodbye to the largest stake of the “upper crust” of funds monitored by Insider Monkey, totaling about $53.1 million in stock. Brian Ashford-Russell and Tim Woolley’s fund, Polar Capital, also said goodbye to its stock, about $37.9 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 1 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Smartsheet Inc. (NYSE:SMAR) but similarly valued. These stocks are Equity Commonwealth (NYSE:EQC), Copa Holdings, S.A. (NYSE:CPA), RLI Corp. (NYSE:RLI), and PNM Resources, Inc. (NYSE:PNM). This group of stocks’ market valuations resemble SMAR’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EQC 24 179039 4
CPA 18 284351 2
RLI 14 184377 -1
PNM 14 413235 1
Average 17.5 265251 1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $265 million. That figure was $1214 million in SMAR’s case. Equity Commonwealth (NYSE:EQC) is the most popular stock in this table. On the other hand RLI Corp. (NYSE:RLI) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Smartsheet Inc. (NYSE:SMAR) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on SMAR as the stock returned 74.2% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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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