Hedge Funds Are Extremely Bullish On DraftKings Inc. (DKNG)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards DraftKings Inc. (NASDAQ:DKNG) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is DraftKings Inc. (NASDAQ:DKNG) a safe investment now? Investors who are in the know were turning bullish. The number of long hedge fund positions went up by 18 recently. DraftKings Inc. (NASDAQ:DKNG) was in 53 hedge funds’ portfolios at the end of June. This is the new all time high for this statistics. Our calculations also showed that DKNG 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 35 hedge funds in our database with DKNG positions at the end of the first quarter.

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

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Sander Gerber of Hudson Bay Capital

Sander Gerber of Hudson Bay Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. 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.. We go through lists like the 10 most profitable companies in America 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now let’s analyze the recent hedge fund action surrounding DraftKings Inc. (NASDAQ:DKNG).

What have hedge funds been doing with DraftKings Inc. (NASDAQ:DKNG)?

At second quarter’s end, a total of 53 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 51% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards DKNG over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Among these funds, Park West Asset Management held the most valuable stake in DraftKings Inc. (NASDAQ:DKNG), which was worth $125.6 million at the end of the third quarter. On the second spot was Hudson Bay Capital Management which amassed $91.3 million worth of shares. Soros Fund Management, Falcon Edge Capital, and Arrowstreet Capital 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 Toscafund Asset Management allocated the biggest weight to DraftKings Inc. (NASDAQ:DKNG), around 10.13% of its 13F portfolio. Kayak Investment Partners is also relatively very bullish on the stock, designating 6.52 percent of its 13F equity portfolio to DKNG.

As one would reasonably expect, key money managers have been driving this bullishness. Park West Asset Management, managed by Peter S. Park, created the most valuable position in DraftKings Inc. (NASDAQ:DKNG). Park West Asset Management had $125.6 million invested in the company at the end of the quarter. George Soros’s Soros Fund Management also made a $82.5 million investment in the stock during the quarter. The following funds were also among the new DKNG investors: Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Anand Parekh’s Alyeska Investment Group, and Noam Gottesman’s GLG Partners.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as DraftKings Inc. (NASDAQ:DKNG) but similarly valued. These stocks are PerkinElmer, Inc. (NYSE:PKI), Cloudflare, Inc. (NYSE:NET), Horizon Therapeutics Public Limited Company (NASDAQ:HZNP), ABIOMED, Inc. (NASDAQ:ABMD), Pool Corporation (NASDAQ:POOL), KB Financial Group, Inc. (NYSE:KB), and Alteryx, Inc. (NYSE:AYX). All of these stocks’ market caps are similar to DKNG’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PKI 30 1263237 9
NET 36 456001 12
HZNP 45 2955360 4
ABMD 31 823991 4
POOL 35 492145 2
KB 6 36329 -1
AYX 48 1612975 5
Average 33 1091434 5

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1091 million. That figure was $694 million in DKNG’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. Compared to these stocks DraftKings Inc. (NASDAQ:DKNG) is more popular among hedge funds. Our overall hedge fund sentiment score for DKNG is 90. 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. 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 still beat the market by 23.2 percentage points. Unfortunately DKNG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DKNG were disappointed as the stock returned 6.3% since the end of the second quarter 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 most of these stocks already outperformed the market in 2020.

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