Did Hedge Funds Make The Right Call On Fastly, Inc. (FSLY) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Fastly, Inc. (NYSE:FSLY) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Fastly, Inc. (NYSE:FSLY) was in 22 hedge funds’ portfolios at the end of the first quarter of 2020. FSLY shareholders have witnessed an increase in hedge fund sentiment in recent months. There were 19 hedge funds in our database with FSLY holdings at the end of the previous quarter. Our calculations also showed that FSLY 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.

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 let’s go over the new hedge fund action encompassing Fastly, Inc. (NYSE:FSLY).

What have hedge funds been doing with Fastly, Inc. (NYSE:FSLY)?

At the end of the first quarter, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in FSLY a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

The largest stake in Fastly, Inc. (NYSE:FSLY) was held by Abdiel Capital Advisors, which reported holding $169 million worth of stock at the end of September. It was followed by Whale Rock Capital Management with a $48.4 million position. Other investors bullish on the company included No Street Capital, Alyeska Investment Group, and Driehaus Capital. In terms of the portfolio weights assigned to each position Abdiel Capital Advisors allocated the biggest weight to Fastly, Inc. (NYSE:FSLY), around 7.9% of its 13F portfolio. Stepstone Group is also relatively very bullish on the stock, dishing out 7.38 percent of its 13F equity portfolio to FSLY.

As aggregate interest increased, some big names were breaking ground themselves. No Street Capital, managed by Jeff Osher, assembled the largest position in Fastly, Inc. (NYSE:FSLY). No Street Capital had $13 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also initiated a $5.7 million position during the quarter. The other funds with new positions in the stock are Paul Marshall and Ian Wace’s Marshall Wace LLP, Dmitry Balyasny’s Balyasny Asset Management, and Noam Gottesman’s GLG Partners.

Let’s now review hedge fund activity in other stocks similar to Fastly, Inc. (NYSE:FSLY). We will take a look at Companhia Siderurgica Nacional (NYSE:SID), Univar Solutions Inc (NYSE:UNVR), EQT Corporation (NYSE:EQT), and CNO Financial Group Inc (NYSE:CNO). This group of stocks’ market values are similar to FSLY’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $286 million. That figure was $277 million in FSLY’s case. Univar Solutions Inc (NYSE:UNVR) is the most popular stock in this table. On the other hand Companhia Siderurgica Nacional (NYSE:SID) is the least popular one with only 5 bullish hedge fund positions. Fastly, Inc. (NYSE:FSLY) 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 FSLY as the stock returned 348.5% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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