Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before 2018’s Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Alphabet Inc (NASDAQ:GOOG) changed recently.
Is Alphabet Inc (NASDAQ:GOOG) a marvelous investment today? The smart money is getting optimistic. The number of bullish hedge fund positions moved up by 10 at the end of Q3. We will see hedge fund’s Q4 holdings in a few weeks. Our calculations also showed that GOOG ranked near the top of the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and and the stock is still extremely cheap despite already gaining 20 percent. Keeping this in mind let’s take a look at the new hedge fund action encompassing Alphabet Inc (NASDAQ:GOOG).
How have hedgies been trading Alphabet Inc (NASDAQ:GOOG)?
At Q3’s end, a total of 136 of the hedge funds tracked by Insider Monkey were long this stock, a change of 8% from the second quarter of 2019. By comparison, 130 hedge funds held shares or bullish call options in GOOG a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Eagle Capital Management held the most valuable stake in Alphabet Inc (NASDAQ:GOOG), which was worth $2331.8 million at the end of the third quarter. On the second spot was Generation Investment Management which amassed $1393.2 million worth of shares. Egerton Capital Limited, GQG Partners, and Orbis Investment Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Key Square Capital Management allocated the biggest weight to Alphabet Inc (NASDAQ:GOOG), around 37.42% of its 13F portfolio. Skye Global Management is also relatively very bullish on the stock, dishing out 27.49 percent of its 13F equity portfolio to GOOG.
As one would reasonably expect, key money managers were leading the bulls’ herd. Key Square Capital Management, managed by Scott Bessent, established the most outsized position in Alphabet Inc (NASDAQ:GOOG). Key Square Capital Management had $135.9 million invested in the company at the end of the quarter. Alexander Captain’s Cat Rock Capital also made a $70.1 million investment in the stock during the quarter. The other funds with brand new GOOG positions are Guy Shahar’s DSAM Partners, Benjamin A. Smith’s Laurion Capital Management, and Michael Gelband’s ExodusPoint Capital.
Let’s check out hedge fund activity in other stocks similar to Alphabet Inc (NASDAQ:GOOG). We will take a look at Berkshire Hathaway Inc. (NYSE:BRK-B), Facebook Inc (NASDAQ:FB), Alibaba Group Holding Limited (NYSE:BABA), and Visa Inc (NYSE:V). This group of stocks’ market valuations are closest to GOOG’s market valuation.
|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 139.75 hedge funds with bullish positions and the average amount invested in these stocks was $19498 million. That figure was $15585 million in GOOG’s case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand Berkshire Hathaway Inc. (NYSE:BRK-B) is the least popular one with only 99 bullish hedge fund positions. Alphabet Inc (NASDAQ:GOOG) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately GOOG wasn’t nearly as successful as these 20 stocks. GOOG investors were slightly disappointed as the stock returned 29.1% in 2019 and trailed the market by 2 percentage points. 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 65 percent of these stocks outperformed the market in 2019.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.