Hedge Funds Are Selling These Cloud Computing Stocks

Cloud computing has displayed exponential growth in the past few years and most tech experts believe that this growth is likely to continue for many years to come. According to estimates, the hybrid cloud space alone will grow to be a $91.74 billion market by 2021, from $33.28 billion in 2016, which would represent a compounded annual growth rate of 22.5%. Despite this remarkable expected growth, there was a contradictory phenomenon we observed while conducting our extensive research on the portfolios of the over 800 funds we track; hedge funds were reducing their exposure to many cloud computing stocks in the first quarter of 2016. While this could just be a one-off phenomenon where hedge funds felt less bullish about the space, or simply wanted to devote resources to other sectors, it is still worth analyzing. Therefore, in this article, we will take a look at five stocks from the cloud computing space which saw the largest drops in their popularity during the first quarter among the hedge funds in our database.

Through extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

F5 Networks, Inc. (NASDAQ:FFIV)

 – Investors with long positions (as of March 31) : 28

 – Aggregate value of investors’ holdings (as of March 31): $1 Billion

Let’s start with F5 Networks, Inc. (NASDAQ:FFIV), which saw its ownership among funds in our system drop by five during the first quarter, though the aggregate value of their holdings in it rose by $238 million during the same period, some of which can be attributed to the 9% rise in F5 Networks, Inc. (NASDAQ:FFIV)’s stock during the quarter. Though shares of the developer of application delivery services have appreciated by 12% so far in 2016, they are still down by 14% over the last year. Since the company is currently trading at a trailing P/E of 21.54, lower than the industry average of 29.26, and is one of the few cloud computing companies that is highly profitable, most analysts expect its stock to perform well going forward. This includes analysts at Drexel Hamilton, who on April 21 reiterated their ‘Overweight’ rating and $145 price target on the stock. Billionaire Jim Simons‘ Renaissance Technologies upped its stake in F5 Networks by 6% to 1.08 million shares during the first quarter.

Citrix Systems, Inc. (NASDAQ:CTXS)

 – Investors with long positions (as of March 31) : 40

 – Aggregate value of investors’ holdings (as of March 31): $1.44 Billion

Citrix Systems, Inc. (NASDAQ:CTXS) is one of the purest plays one can find in the cloud space, as the company’s primary business revolves around selling products and services that enable the delivery of applications and data over various types of clouds, to virtually any type of device. Though its stock was stuck in the $60-to-$80 range for much of the last five years, it has recently broken above that range convincingly and is trading near to its 52-week high. Nonetheless, the number of hedge funds in our database that held a stake in Citrix Systems, Inc. (NASDAQ:CTXS) dropped by five in the first quarter, while the aggregate value of their holdings in it fell by about $30 million despite shares gaining about 4% during the quarter. Funds that reduced their stake in the company during the first quarter included Craig C. Albert‘s Sheffield Asset Management, which cut its holding down by 38% to 226,788 shares.

Be wary of three more cloud computing stocks that hedge funds were selling in the first quarter; check them out on the next page.

Equinix Inc (NASDAQ:EQIX)

 – Investors with long positions (as of March 31) : 43

 – Aggregate value of investors’ holdings (as of March 31): $2.98 Billion

With year-to-date gains of 21.2%, Equinix Inc (NASDAQ:EQIX) is the best performing cloud computing stock so far in 2016 among those in this list. However, since a large part of those gains came in the second quarter, hedge funds that sold or reduced their stakes in the company during the first quarter are likely regretting their move thus far. Ownership of Equinix Inc (NASDAQ:EQIX) among the funds covered by Insider Monkey decreased by four in the first quarter, while the aggregate value of their holdings in it fell by $534 million. Among the few funds that made the wise decision (in retrospect) to increase their stakes in the company during the first quarter was Edmond M. Safra’s EMS Capital, which boosted its holding by 15% to 240,000 shares. Equinix is one of the few cloud computing companies that pays a dividend to its shareholders, with the $1.75 per share quarterly dividend it pays translating into an annual dividend yield of 1.91%.

Rackspace Hosting, Inc. (NYSE:RAX)

 – Investors with long positions (as of March 31) : 24

 – Aggregate value of investors’ holdings (as of March 31): $523.08 Million

Shares of Rackspace Hosting, Inc. (NYSE:RAX) have suffered a massive decline in the past twelve months, losing almost 57% of their value. While they have managed to recoup some of the losses that they suffered at the beginning of this year, they are still trading in the red for 2016. In the past, Rackspace Hosting, Inc. (NYSE:RAX) lost a lot of ground in the cloud computing market by trying to compete directly with the likes of Amazon Web Services and Microsoft’s Azure. However, after the company announced that its ‘fanatical support’ will cover both those platforms in separate announcements during the second-half of 2015, industry observers and analysts became bullish on the future prospects of the company. Hedge funds in our system on the other hand don’t seem to share that sentiment, as ownership of Rackspace fell by 20% in the first quarter and the aggregate value of their holdings in it declined by $162 million. Funds that initiated a stake in Rackspace during the first quarter included Paul Hondros’ AlphaOne Capital Partners, which purchased 120,400 shares of the company.

Tableau Software Inc (NYSE:DATA)

 – Investors with long positions (as of March 31) : 34

 – Aggregate value of investors’ holdings (as of March 31): $830.62 Million

With the company losing more than half of its market capitalization during the first quarter, it isn’t a surprise that Tableau Software Inc (NYSE:DATA) saw a significant decline in its popularity during that period. The number of funds in our system that held a stake in Tableau Software Inc (NYSE:DATA) dropped by nine and the aggregate value of their holdings in it dropped by 42% during the January-to-March period. Funds that sold off their entire stake in the company during that time included D.E. Shaw, founded by David E. Shaw, and Sheetal Duggal‘s Thrax Management. On May 5, the company reported its first quarter results, declaring EPS of $0.33 on revenue of $202.80 million, narrowly topping estimates of EPS of $0.31 on revenue of $200.89 million. Despite those better-than-expected quarterly numbers, Tableau’s stock has failed to recover significantly from its first quarter collapse and currently trades down by 47% year-to-date. On May 9, analysts at Jeffries Group reiterated their ‘Hold’ rating on the stock while lowering their price target on it to $56 from $65.

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