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Hedge Funds Are Coming Back To Cloudflare, Inc. (NET)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Cloudflare, Inc. (NYSE:NET) and determine whether the smart money was really smart about this stock.

Is Cloudflare, Inc. (NYSE:NET) a first-rate investment today? Prominent investors were turning bullish. The number of bullish hedge fund positions rose by 12 recently. Cloudflare, Inc. (NYSE:NET) was in 36 hedge funds’ portfolios at the end of June. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that NET isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 24 hedge funds in our database with NET holdings at the end of March.

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a lot of signals market participants employ to evaluate publicly traded companies. A couple of the most underrated signals are hedge fund and insider trading signals. We have shown that, historically, those who follow the top picks of the best hedge fund managers can outclass the market by a solid margin (see the details here).

Noam Gottesman GLG Partners

Noam Gottesman of GLG Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Keeping this in mind we’re going to view the latest hedge fund action surrounding Cloudflare, Inc. (NYSE:NET).

How have hedgies been trading Cloudflare, Inc. (NYSE:NET)?

At the end of the second quarter, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 50% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards NET over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Whale Rock Capital Management, managed by Alex Sacerdote, holds the largest position in Cloudflare, Inc. (NYSE:NET). Whale Rock Capital Management has a $124.2 million position in the stock, comprising 1% of its 13F portfolio. On Whale Rock Capital Management’s heels is Brian Ashford-Russell and Tim Woolley of Polar Capital, with a $68.8 million position; 0.6% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors that are bullish include Mark Moore’s ThornTree Capital Partners, Israel Englander’s Millennium Management and Seth Wunder’s Black-and-White Capital. In terms of the portfolio weights assigned to each position ThornTree Capital Partners allocated the biggest weight to Cloudflare, Inc. (NYSE:NET), around 5.2% of its 13F portfolio. Whetstone Capital Advisors is also relatively very bullish on the stock, dishing out 3.48 percent of its 13F equity portfolio to NET.

As aggregate interest increased, specific money managers were leading the bulls’ herd. Engle Capital, managed by Jeffrey Hoffner, created the most outsized position in Cloudflare, Inc. (NYSE:NET). Engle Capital had $19.8 million invested in the company at the end of the quarter. Joel Ramin’s 12 West Capital Management also initiated a $12.7 million position during the quarter. The following funds were also among the new NET investors: Anand Parekh’s Alyeska Investment Group, Dmitry Balyasny’s Balyasny Asset Management, and Noam Gottesman’s GLG Partners.

Let’s go over hedge fund activity in other stocks similar to Cloudflare, Inc. (NYSE:NET). These stocks are Horizon Therapeutics Public Limited Company (NASDAQ:HZNP), ABIOMED, Inc. (NASDAQ:ABMD), Pool Corporation (NASDAQ:POOL), KB Financial Group, Inc. (NYSE:KB), Alteryx, Inc. (NYSE:AYX), Gartner Inc (NYSE:IT), and Trimble Inc. (NASDAQ:TRMB). This group of stocks’ market caps are similar to NET’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
HZNP 45 2955360 4
ABMD 31 823991 4
POOL 35 492145 2
KB 6 36329 -1
AYX 48 1612975 5
IT 32 1302132 0
TRMB 26 979865 6
Average 31.9 1171828 2.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.9 hedge funds with bullish positions and the average amount invested in these stocks was $1172 million. That figure was $456 million in NET’s case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand KB Financial Group, Inc. (NYSE:KB) is the least popular one with only 6 bullish hedge fund positions. Cloudflare, Inc. (NYSE:NET) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NET is 75.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately NET wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on NET were disappointed as the stock returned 6.4% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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Disclosure: None. This article was originally published at Insider Monkey.