The first quarter was a breeze as Powell pivoted, and China seemed eager to reach a deal with Trump. Both the S&P 500 and Russell 2000 delivered very strong gains as a result, with the Russell 2000, which is composed of smaller companies, outperforming the large-cap stocks slightly during the first quarter. Unfortunately sentiment shifted in May and August as this time China pivoted and Trump put more pressure on China by increasing tariffs. Fourth quarter brought optimism to the markets and hedge funds’ top 20 stock picks performed spectacularly in this volatile environment. These stocks delivered a total gain of 37.4% through the end of November, vs. a gain of 27.5% for the S&P 500 ETF. In this article we will look at how this market volatility affected the sentiment of hedge funds towards Twilio Inc. (NYSE:TWLO), and what that likely means for the prospects of the company and its stock.
Is Twilio Inc. (NYSE:TWLO) a buy right now? Money managers are in a pessimistic mood. The number of long hedge fund bets were cut by 4 in recent months. Our calculations also showed that TWLO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to analyze the latest hedge fund action encompassing Twilio Inc. (NYSE:TWLO).
Hedge fund activity in Twilio Inc. (NYSE:TWLO)
Heading into the fourth quarter of 2019, a total of 59 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 41 hedge funds with a bullish position in TWLO a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
The largest stake in Twilio Inc. (NYSE:TWLO) was held by Tybourne Capital Management, which reported holding $327.7 million worth of stock at the end of September. It was followed by Foxhaven Asset Management with a $292.8 million position. Other investors bullish on the company included SCGE Management, Whale Rock Capital Management, and Tiger Global Management. In terms of the portfolio weights assigned to each position Tybourne Capital Management allocated the biggest weight to Twilio Inc. (NYSE:TWLO), around 14.24% of its portfolio. SCGE Management is also relatively very bullish on the stock, designating 11.92 percent of its 13F equity portfolio to TWLO.
Seeing as Twilio Inc. (NYSE:TWLO) has faced declining sentiment from hedge fund managers, we can see that there lies a certain “tier” of money managers who sold off their full holdings in the third quarter. It’s worth mentioning that Michael Pausic’s Foxhaven Asset Management dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $65.4 million in stock. Josh Donfeld and David Rogers’s fund, Castle Hook Partners, also cut its stock, about $48.7 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds in the third quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Twilio Inc. (NYSE:TWLO) but similarly valued. We will take a look at Conagra Brands, Inc. (NYSE:CAG), Waters Corporation (NYSE:WAT), Mid-America Apartment Communities, Inc. (NYSE:MAA), and Huntington Bancshares Incorporated (NASDAQ:HBAN). This group of stocks’ market values match TWLO’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $418 million. That figure was $2260 million in TWLO’s case. Conagra Brands, Inc. (NYSE:CAG) is the most popular stock in this table. On the other hand Mid-America Apartment Communities, Inc. (NYSE:MAA) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Twilio Inc. (NYSE:TWLO) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately TWLO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on TWLO were disappointed as the stock returned -6.1% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.