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Did Hedge Funds Make The Right Call On Cardlytics, Inc. (CDLX) ?

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 Cardlytics, Inc. (NASDAQ:CDLX) and determine whether hedge funds had an edge regarding this stock.

Cardlytics, Inc. (NASDAQ:CDLX) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 26 hedge funds’ portfolios at the end of the first quarter of 2020. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Standard Motor Products, Inc. (NYSE:SMP), First Busey Corporation (NASDAQ:BUSE), and Sonos, Inc. (NASDAQ:SONO) to gather more data points. Our calculations also showed that CDLX 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).

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 has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

CAS Investment Partners, Cliff Sosin

Clifford Sosin of CAS Investment Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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 we are checking out this tiny lithium stock. With all of this in mind let’s take a gander at the latest hedge fund action encompassing Cardlytics, Inc. (NASDAQ:CDLX).

How have hedgies been trading Cardlytics, Inc. (NASDAQ:CDLX)?

At the end of the first quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. By comparison, 9 hedge funds held shares or bullish call options in CDLX a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Clifford A. Sosin’s CAS Investment Partners has the number one position in Cardlytics, Inc. (NASDAQ:CDLX), worth close to $138.1 million, corresponding to 30.4% of its total 13F portfolio. Coming in second is 683 Capital Partners, led by Ari Zweiman, holding a $30.3 million position; the fund has 3.6% of its 13F portfolio invested in the stock. Some other peers that are bullish comprise Eric Chen’s Antipodean Advisors, Jonathan Soros’s JS Capital and Vadim Rubinchik’s Brightlight Capital. In terms of the portfolio weights assigned to each position CAS Investment Partners allocated the biggest weight to Cardlytics, Inc. (NASDAQ:CDLX), around 30.38% of its 13F portfolio. Antipodean Advisors is also relatively very bullish on the stock, designating 21.17 percent of its 13F equity portfolio to CDLX.

Seeing as Cardlytics, Inc. (NASDAQ:CDLX) has witnessed falling interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of money managers that decided to sell off their full holdings last quarter. Intriguingly, Dipak Patel’s Alight Capital dropped the biggest position of all the hedgies followed by Insider Monkey, totaling about $2 million in stock, and Principal Global Investors’s Columbus Circle Investors was right behind this move, as the fund cut about $1.8 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Cardlytics, Inc. (NASDAQ:CDLX) but similarly valued. These stocks are Standard Motor Products, Inc. (NYSE:SMP), First Busey Corporation (NASDAQ:BUSE), Sonos, Inc. (NASDAQ:SONO), and Carpenter Technology Corporation (NYSE:CRS). This group of stocks’ market caps are closest to CDLX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SMP 9 68050 -1
BUSE 11 27678 -1
SONO 33 139823 7
CRS 16 47508 0
Average 17.25 70765 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $71 million. That figure was $292 million in CDLX’s case. Sonos, Inc. (NASDAQ:SONO) is the most popular stock in this table. On the other hand Standard Motor Products, Inc. (NYSE:SMP) is the least popular one with only 9 bullish hedge fund positions. Cardlytics, Inc. (NASDAQ:CDLX) is not the most popular stock in this group but hedge fund interest is still above 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on CDLX as the stock returned 100.2% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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