Did Hedge Funds Drop The Ball On Roku, Inc. (ROKU) ?

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 15 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 19.7% during the first 2.5 months of 2019 (vs. 13.1% gain for SPY), with 93% of these stocks outperforming the benchmark. 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 Roku, Inc. (NASDAQ:ROKU).

Is Roku, Inc. (NASDAQ:ROKU) the right investment to pursue these days? The smart money is in a pessimistic mood. The number of long hedge fund bets went down by 5 lately. Our calculations also showed that roku isn’t among the 30 most popular stocks among hedge funds. ROKU was in 26 hedge funds’ portfolios at the end of December. There were 31 hedge funds in our database with ROKU positions at the end of the previous quarter.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 27.5% through March 12, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Keidan of Buckingham Capital

We’re going to view the new hedge fund action surrounding Roku, Inc. (NASDAQ:ROKU).

How are hedge funds trading Roku, Inc. (NASDAQ:ROKU)?

Heading into the first quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ROKU over the last 14 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds With ROKU Positions

Among these funds, Alkeon Capital Management held the most valuable stake in Roku, Inc. (NASDAQ:ROKU), which was worth $38.2 million at the end of the third quarter. On the second spot was 12 West Capital Management which amassed $29.4 million worth of shares. Moreover, Citadel Investment Group, Point72 Asset Management, and Buckingham Capital Management were also bullish on Roku, Inc. (NASDAQ:ROKU), allocating a large percentage of their portfolios to this stock.

Because Roku, Inc. (NASDAQ:ROKU) has faced declining sentiment from hedge fund managers, it’s easy to see that there exists a select few hedge funds that elected to cut their positions entirely in the third quarter. Intriguingly, Philippe Laffont’s Coatue Management cut the biggest investment of all the hedgies watched by Insider Monkey, worth an estimated $247.3 million in stock, and Alex Sacerdote’s Whale Rock Capital Management was right behind this move, as the fund sold off about $103.1 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 5 funds in the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Roku, Inc. (NASDAQ:ROKU) but similarly valued. We will take a look at MB Financial, Inc. (NASDAQ:MBFI), Clearway Energy, Inc. (NYSE:CWEN), Chimera Investment Corporation (NYSE:CIM), and Lions Gate Entertainment Corporation (NYSE:LGF-A). This group of stocks’ market caps match ROKU’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MBFI 18 190649 5
CWEN 12 90190 -4
CIM 11 29852 -1
LGF-A 21 339702 4
Average 15.5 162598 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.5 hedge funds with bullish positions and the average amount invested in these stocks was $163 million. That figure was $126 million in ROKU’s case. Lions Gate Entertainment Corporation (NYSE:LGF-A) is the most popular stock in this table. On the other hand Chimera Investment Corporation (NYSE:CIM) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Roku, Inc. (NASDAQ:ROKU) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on ROKU as the stock returned 89.9% 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.

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