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Hedge Fund Darlings vs. Tesla Inc. (TSLA) In 2019

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 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. 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 Tesla Inc. (NASDAQ:TSLA).

Is Tesla Inc. (NASDAQ:TSLA) worth your attention right now? Hedge funds are reducing their bets on the stock. The number of bullish hedge fund bets were cut by 9 lately. Our calculations also showed that TSLA isn’t among 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’ 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.

Matthew Hulsizer PEAK6 Capital

Matthew Hulsizer of PEAK6 Capital

We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his 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 the stock is still extremely cheap despite already gaining 20 percent. Now we’re going to take a look at the latest hedge fund action surrounding Tesla Inc. (NASDAQ:TSLA).

How are hedge funds trading Tesla Inc. (NASDAQ:TSLA)?

At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -24% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in TSLA over the last 17 quarters. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

The largest stake in Tesla Inc. (NASDAQ:TSLA) was held by Renaissance Technologies, which reported holding $161.6 million worth of stock at the end of September. It was followed by SoMa Equity Partners with a $77.1 million position. Other investors bullish on the company included Citadel Investment Group, PEAK6 Capital Management, and Point72 Asset Management. In terms of the portfolio weights assigned to each position Albar Capital allocated the biggest weight to Tesla Inc. (NASDAQ:TSLA), around 9.18% of its 13F portfolio. SoMa Equity Partners is also relatively very bullish on the stock, earmarking 5.45 percent of its 13F equity portfolio to TSLA.

Judging by the fact that Tesla Inc. (NASDAQ:TSLA) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there were a few funds that slashed their positions entirely last quarter. It’s worth mentioning that Herb Wagner’s FinePoint Capital sold off the largest stake of the “upper crust” of funds monitored by Insider Monkey, worth about $64.2 million in call options, and Michel Massoud’s Melqart Asset Management was right behind this move, as the fund cut about $55.9 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 9 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Tesla Inc. (NASDAQ:TSLA) but similarly valued. We will take a look at EOG Resources Inc (NYSE:EOG), Biogen Inc. (NASDAQ:BIIB), Public Storage (NYSE:PSA), and Capital One Financial Corporation (NYSE:COF). This group of stocks’ market valuations match TSLA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
EOG 48 1449930 12
BIIB 48 4207480 5
PSA 22 876105 2
COF 42 1936605 0
Average 40 2117530 4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 40 hedge funds with bullish positions and the average amount invested in these stocks was $2118 million. That figure was $571 million in TSLA’s case. EOG Resources Inc (NYSE:EOG) is the most popular stock in this table. On the other hand Public Storage (NYSE:PSA) is the least popular one with only 22 bullish hedge fund positions. Tesla Inc. (NASDAQ:TSLA) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately TSLA wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); TSLA investors were disappointed as the stock returned 26% in 2019 (as of 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019.
5 Most Popular Stocks Among Hedge Funds
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.

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