Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients’ money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth depends on it. Regardless of the various methods used by elite investors like David Tepper and Dan Loeb, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space.
Is Roku, Inc. (NASDAQ:ROKU) a splendid investment now? The best stock pickers are becoming more confident. The number of long hedge fund positions increased by 8 lately. Our calculations also showed that ROKU isn’t among the 30 most popular stocks among hedge funds. ROKU was in 31 hedge funds’ portfolios at the end of September. There were 23 hedge funds in our database with ROKU positions at the end of the previous quarter.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let’s check out the fresh hedge fund action encompassing Roku, Inc. (NASDAQ:ROKU).
What have hedge funds been doing with Roku, Inc. (NASDAQ:ROKU)?
At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 35% from the previous quarter. By comparison, 10 hedge funds held shares or bullish call options in ROKU heading into this year. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Coatue Management, managed by Philippe Laffont, holds the largest position in Roku, Inc. (NASDAQ:ROKU). Coatue Management has a $247.3 million position in the stock, comprising 2.6% of its 13F portfolio. The second most bullish fund manager is Whale Rock Capital Management, led by Alex Sacerdote, holding a $103.1 million position; the fund has 2.3% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions comprise Panayotis Takis Sparaggis’s Alkeon Capital Management, James Crichton’s Hitchwood Capital Management and Gabriel Plotkin’s Melvin Capital Management.
As aggregate interest increased, specific money managers were leading the bulls’ herd. Coatue Management, managed by Philippe Laffont, initiated the biggest position in Roku, Inc. (NASDAQ:ROKU). Coatue Management had $247.3 million invested in the company at the end of the quarter. Panayotis Takis Sparaggis’s Alkeon Capital Management also made a $91.3 million investment in the stock during the quarter. The other funds with brand new ROKU positions are Joel Ramin’s 12 West Capital Management, Gabriel Plotkin’s Melvin Capital Management, and Jim Simons’s Renaissance Technologies.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Roku, Inc. (NASDAQ:ROKU) but similarly valued. These stocks are Israel Chemicals Ltd. (NYSE:ICL), Pinnacle Foods Inc (NYSE:PF), Bio-Techne Corporation (NASDAQ:TECH), and Encompass Health Corporation (NYSE:EHC). This group of stocks’ market valuations resemble ROKU’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ICL | 8 | 40795 | 2 |
| PF | 35 | 2333165 | -11 |
| TECH | 18 | 316289 | 1 |
| EHC | 25 | 401049 | 3 |
| Average | 21.5 | 772825 | -1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $773 million. That figure was $788 million in ROKU’s case. Pinnacle Foods Inc (NYSE:PF) is the most popular stock in this table. On the other hand Israel Chemicals Ltd. (NYSE:ICL) is the least popular one with only 8 bullish hedge fund positions. Roku, Inc. (NASDAQ:ROKU) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard PF might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.
