Hedge Funds’ #1 Stock Pick Debunked Naysayers

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In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 Amazon.com, Inc. (NASDAQ:AMZN).

Amazon.com (NASDAQ:AMZN), The Washington Post (NYSE:WPO), Berkshire Hathaway Inc. (NYSE:BRK.A), Apple Inc. (NASDAQ:AAPL)

Is Amazon.com, Inc. (NASDAQ:AMZN) an exceptional investment now? Prominent investors are taking an extremely optimistic view. The number of long hedge fund bets increased by 21 during the fourth quarter catapulting Amazon into the top spot among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

If you listen to the mainstream financial media, you should avoid stock picking and invest in low-cost index funds. This is indeed what you should do if you want to generate average returns. Mainstream financial media journalists try to make you believe that it isn’t possible to pick winners and losers, and you should ignore the stock picks of hedge fund managers. You may remember reading an article in the WSJ that said “random dart throwing monkeys beat hedge fund stars”. What they fail to tell you is that the top 5 hedge fund stocks returned more than 30% since the end of 2018 and beat the S&P 500 Index by nearly 25 percentage points. You can’t explain this kind of outperformance by luck or coincidence. WSJ will need an army of monkeys to throw darts and tens of thousands of attempts to match these returns.

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations We are probably at the peak of the COVID-19 pandemic, so we check out this biotech investor’s coronavirus picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to view the recent hedge fund action surrounding Amazon.com, Inc. (NASDAQ:AMZN).

Hedge fund activity in Amazon.com, Inc. (NASDAQ:AMZN)

Heading into the first quarter of 2020, a total of 202 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from the third quarter of 2019. The graph below displays the percentage of hedge funds with bullish position in AMZN over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

AMZN_dec2019 Hedge Fund Sentiment

The largest stake in Amazon.com, Inc. (NASDAQ:AMZN) was held by Citadel Investment Group, which reported holding $5353 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $3263.9 million position. Other investors bullish on the company included Eagle Capital Management, Viking Global, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Ursa Fund Management allocated the biggest weight to Amazon.com, Inc. (NASDAQ:AMZN), around 36.08% of its 13F portfolio. Crake Asset Management is also relatively very bullish on the stock, designating 16.34 percent of its 13F equity portfolio to AMZN.

With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. Ursa Fund Management, managed by Andrew Hahn, initiated the largest position in Amazon.com, Inc. (NASDAQ:AMZN). Ursa Fund Management had $863.5 million invested in the company at the end of the quarter. Jim Simons (founder)’s Renaissance Technologies also initiated a $623.2 million position during the quarter. The other funds with brand new AMZN positions are Rajiv Jain’s GQG Partners, Aaron Cowen’s Suvretta Capital Management, and Dan Loeb’s Third Point.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Amazon.com, Inc. (NASDAQ:AMZN) but similarly valued. These stocks are Facebook Inc (NASDAQ:FB), Alibaba Group Holding Limited (NYSE:BABA), JPMorgan Chase & Co. (NYSE:JPM), and Visa Inc (NYSE:V). All of these stocks’ market caps are closest to AMZN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FB 198 24395049 6
BABA 170 22442887 10
JPM 98 13134286 4
V 143 16812443 -4
Average 152.25 19196166 4

View table here if you experience formatting issues.

As you can see these stocks had an average of 152.25 hedge funds with bullish positions and the average amount invested in these stocks was $19196 million. That figure was $28001 million in AMZN’s case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand JPMorgan Chase & Co. (NYSE:JPM) is the least popular one with only 98 bullish hedge fund positions. Compared to these stocks Amazon.com, Inc. (NASDAQ:AMZN) is more popular among hedge funds. 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 lost 1.0% in 2020 through April 20th but still managed to beat the market by 11 percentage points. Hedge funds were also right about betting on AMZN as the stock returned 29.5% so far in 2020 (through April 20th) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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.