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2019 Review: Top Hedge Fund Stocks vs. Zillow Group Inc (Z)

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Zillow Group Inc (NASDAQ:Z).

Zillow Group Inc (NASDAQ:Z) shareholders have witnessed a decrease in hedge fund sentiment of late. Our calculations also showed that Z 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).

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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.

Ricky Sandler of Eminence Capital

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 fresh hedge fund action regarding Zillow Group Inc (NASDAQ:Z).

What does smart money think about Zillow Group Inc (NASDAQ:Z)?

At the end of the third quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in Z over the last 17 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

The largest stake in Zillow Group Inc (NASDAQ:Z) was held by SRS Investment Management, which reported holding $222.2 million worth of stock at the end of September. It was followed by Slate Path Capital with a $87.2 million position. Other investors bullish on the company included Eminence Capital, Teton Capital, and Matrix Capital Management. In terms of the portfolio weights assigned to each position Teton Capital allocated the biggest weight to Zillow Group Inc (NASDAQ:Z), around 12.41% of its 13F portfolio. ThornTree Capital Partners is also relatively very bullish on the stock, dishing out 6.41 percent of its 13F equity portfolio to Z.

Since Zillow Group Inc (NASDAQ:Z) has witnessed a decline in interest from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of hedge funds who sold off their positions entirely heading into Q4. It’s worth mentioning that Josh Donfeld and David Rogers’s Castle Hook Partners said goodbye to the biggest stake of the “upper crust” of funds monitored by Insider Monkey, totaling close to $60.5 million in stock. Karthik Sarma’s fund, SRS Investment Management, also cut its stock, about $41.6 million worth. These moves are interesting, as aggregate hedge fund interest fell by 13 funds heading into Q4.

Let’s now take a look at hedge fund activity in other stocks similar to Zillow Group Inc (NASDAQ:Z). We will take a look at Flowserve Corporation (NYSE:FLS), Sabre Corporation (NASDAQ:SABR), First Solar, Inc. (NASDAQ:FSLR), and Ciena Corporation (NYSE:CIEN). This group of stocks’ market valuations are similar to Z’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FLS 19 225613 -7
SABR 25 224467 13
FSLR 30 347342 6
CIEN 29 489215 -7
Average 25.75 321659 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $322 million. That figure was $880 million in Z’s case. First Solar, Inc. (NASDAQ:FSLR) is the most popular stock in this table. On the other hand Flowserve Corporation (NYSE:FLS) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Zillow Group Inc (NASDAQ:Z) 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 Z, though not to the same extent, as the stock returned 40.6% during the same period and outperformed the market as well.
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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