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Cloudflare, Inc. (NET): Are Hedge Funds Right About This Stock?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Cloudflare, Inc. (NYSE:NET) and determine whether hedge funds had an edge regarding this stock.

Is Cloudflare, Inc. (NYSE:NET) worth your attention right now? Prominent investors were getting more bullish. The number of long hedge fund positions increased by 2 recently. Our calculations also showed that NET isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). NET was in 24 hedge funds’ portfolios at the end of the first quarter of 2020. There were 22 hedge funds in our database with NET holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 percentage points since March 2017 (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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

RENAISSANCE TECHNOLOGIES

Jim Simons of Renaissance Technologies

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to take a look at the new hedge fund action encompassing Cloudflare, Inc. (NYSE:NET).

How are hedge funds trading Cloudflare, Inc. (NYSE:NET)?

Heading into the second quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in NET a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is NET A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Greenspring Associates, managed by C. Ashton Newhall and James Lim, holds the number one position in Cloudflare, Inc. (NYSE:NET). Greenspring Associates has a $113.7 million position in the stock, comprising 47.1% of its 13F portfolio. The second most bullish fund manager is Whale Rock Capital Management, led by Alex Sacerdote, holding a $102.6 million position; 1.4% of its 13F portfolio is allocated to the stock. Remaining peers with similar optimism consist of Brian Ashford-Russell and Tim Woolley’s Polar Capital, Josh Resnick’s Jericho Capital Asset Management and Seth Wunder’s Black-and-White Capital. In terms of the portfolio weights assigned to each position Greenspring Associates allocated the biggest weight to Cloudflare, Inc. (NYSE:NET), around 47.08% of its 13F portfolio. Hidden Lake Asset Management is also relatively very bullish on the stock, setting aside 9.57 percent of its 13F equity portfolio to NET.

As industrywide interest jumped, key hedge funds have been driving this bullishness. Whale Rock Capital Management, managed by Alex Sacerdote, established the largest position in Cloudflare, Inc. (NYSE:NET). Whale Rock Capital Management had $102.6 million invested in the company at the end of the quarter. Seth Wunder’s Black-and-White Capital also initiated a $31.3 million position during the quarter. The other funds with new positions in the stock are Mark Moore’s ThornTree Capital Partners, Renaissance Technologies, and Kevin Mok’s Hidden Lake Asset Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Cloudflare, Inc. (NYSE:NET) but similarly valued. We will take a look at CyrusOne Inc (NASDAQ:CONE), Service Corporation International (NYSE:SCI), PTC Inc (NASDAQ:PTC), and Algonquin Power & Utilities Corp. (NYSE:AQN). This group of stocks’ market caps are similar to NET’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CONE 31 317450 -1
SCI 30 398250 12
PTC 35 1181835 0
AQN 14 253831 1
Average 27.5 537842 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $538 million. That figure was $499 million in NET’s case. PTC Inc (NASDAQ:PTC) is the most popular stock in this table. On the other hand Algonquin Power & Utilities Corp. (NYSE:AQN) is the least popular one with only 14 bullish hedge fund positions. Cloudflare, Inc. (NYSE:NET) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on NET as the stock returned 53.1% during the second quarter and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.