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Hedge Funds Are Selling Microsoft Corporation (MSFT)

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Microsoft Corporation (NASDAQ:MSFT) based on that data and determine whether they were really smart about the stock.

Is Microsoft Corporation (NASDAQ:MSFT) the right investment to pursue these days? Prominent investors were cutting their exposure. The number of bullish hedge fund bets went down by 13 in recent months. The number of bullish hedge fund positions in Microsoft was at its all time high at the end of March. Our calculations also showed that MSFT is still ranked #2 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).

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 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 S&P 500 ETFs by 58 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 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.

Chase Coleman of Tiger Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out ideas like this under-the-radar stock to identify the next tenbagger. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. 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. With all of this in mind we’re going to view the fresh hedge fund action regarding Microsoft Corporation (NASDAQ:MSFT).

Hedge fund activity in Microsoft Corporation (NASDAQ:MSFT)

At the end of the second quarter, a total of 222 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. On the other hand, there were a total of 167 hedge funds with a bullish position in MSFT a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Fisher Asset Management held the most valuable stake in Microsoft Corporation (NASDAQ:MSFT), which was worth $4447.3 million at the end of the third quarter. On the second spot was Eagle Capital Management which amassed $2883.4 million worth of shares. Arrowstreet Capital, Tiger Global Management LLC, and AQR Capital Management 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 Joho Capital allocated the biggest weight to Microsoft Corporation (NASDAQ:MSFT), around 42.97% of its 13F portfolio. Skye Global Management is also relatively very bullish on the stock, dishing out 17.41 percent of its 13F equity portfolio to MSFT.

Due to the fact that Microsoft Corporation (NASDAQ:MSFT) has experienced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there is a sect of money managers that decided to sell off their full holdings heading into Q3. At the top of the heap, Bruce Kovner’s Caxton Associates LP said goodbye to the biggest investment of all the hedgies watched by Insider Monkey, valued at about $82.8 million in stock, and Scott Bessent’s Key Square Capital Management was right behind this move, as the fund said goodbye to about $78.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 13 funds heading into Q3.

Let’s now review hedge fund activity in other stocks similar to Microsoft Corporation (NASDAQ:MSFT). These stocks are Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), Alphabet Inc (NASDAQ:GOOG), Alibaba Group Holding Limited (NYSE:BABA), Facebook Inc (NASDAQ:FB), and Berkshire Hathaway Inc. (NYSE:BRK-B). This group of stocks’ market valuations match MSFT’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AAPL 128 105963959 5
AMZN 248 43217853 -3
GOOGL 157 13533499 -10
GOOG 144 14761874 -3
BABA 154 24386257 -13
FB 210 25222524 -3
BRK-B 107 15633556 -8
Average 164 34674217 -5

View table here if you experience formatting issues.

As you can see these stocks had an average of 164 hedge funds with bullish positions and the average amount invested in these stocks was $34.7 billion. That figure was $38.7 billion in MSFT’s case. Amazon.com, Inc. (NASDAQ:AMZN) is the most popular stock in this table. On the other hand Berkshire Hathaway Inc. (NYSE:BRK-B) is the least popular one with only 107 bullish hedge fund positions. Microsoft Corporation (NASDAQ:MSFT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MSFT is 97.8. 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 28.2% in 2020 through August 24th but beat the market by 20.6 percentage points. Unfortunately MSFT wasn’t nearly as successful as the rest of the 10 stocks and hedge funds that were betting on MSFT were disappointed as the stock returned 5.3% 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.