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Hedge Funds Are Trimming Take-Two Interactive (TTWO), But Still Bullish

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Take-Two Interactive Software, Inc. (NASDAQ:TTWO) and determine whether hedge funds had an edge regarding this stock.

Is Take-Two Interactive Software, Inc. (NASDAQ:TTWO) a first-rate stock to buy now? The best stock pickers were getting less optimistic. The number of long hedge fund bets were cut by 5 lately. Take-Two Interactive Software, Inc. (NASDAQ:TTWO) was in 61 hedge funds’ portfolios at the end of June. The all time high for this statistics is 66. Our calculations also showed that TTWO 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).

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

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 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 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 stocks that are in our short portfolio.

Peter Rathjens Arrowstreet Capital 394

Peter Rathjens of Arrowstreet Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. 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. With all of this in mind let’s analyze the latest hedge fund action regarding Take-Two Interactive Software, Inc. (NASDAQ:TTWO).

What does smart money think about Take-Two Interactive Software, Inc. (NASDAQ:TTWO)?

Heading into the third quarter of 2020, a total of 61 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in TTWO over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Take-Two Interactive Software, Inc. (NASDAQ:TTWO) was held by Renaissance Technologies, which reported holding $189 million worth of stock at the end of September. It was followed by Suvretta Capital Management with a $113.6 million position. Other investors bullish on the company included Arrowstreet Capital, Polar Capital, and Third Point. In terms of the portfolio weights assigned to each position Thunderbird Partners allocated the biggest weight to Take-Two Interactive Software, Inc. (NASDAQ:TTWO), around 9.41% of its 13F portfolio. Rip Road Capital is also relatively very bullish on the stock, setting aside 8.43 percent of its 13F equity portfolio to TTWO.

Due to the fact that Take-Two Interactive Software, Inc. (NASDAQ:TTWO) has faced a decline in interest from hedge fund managers, we can see that there is a sect of hedgies that elected to cut their full holdings by the end of the second quarter. At the top of the heap, Gabriel Plotkin’s Melvin Capital Management dropped the largest investment of the 750 funds followed by Insider Monkey, comprising about $401.2 million in stock. Andrew Immerman and Jeremy Schiffman’s fund, Palestra Capital Management, also dumped its stock, about $63.5 million worth. These moves are important to note, as total hedge fund interest fell by 5 funds by the end of the second quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Take-Two Interactive Software, Inc. (NASDAQ:TTWO) but similarly valued. These stocks are Arista Networks Inc (NYSE:ANET), Baker Hughes Company (NYSE:BKR), Agnico Eagle Mines Limited (NYSE:AEM), ORIX Corporation (NYSE:IX), Trip.com Group Limited (NASDAQ:TCOM), Invitation Homes Inc. (NYSE:INVH), and Check Point Software Technologies Ltd. (NASDAQ:CHKP). This group of stocks’ market valuations match TTWO’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ANET 33 510414 9
BKR 27 403640 -3
AEM 30 594031 5
IX 4 3765 0
TCOM 29 1235313 -2
INVH 33 694166 6
CHKP 28 725079 -1
Average 26.3 595201 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.3 hedge funds with bullish positions and the average amount invested in these stocks was $595 million. That figure was $1413 million in TTWO’s case. Arista Networks Inc (NYSE:ANET) is the most popular stock in this table. On the other hand ORIX Corporation (NYSE:IX) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Take-Two Interactive Software, Inc. (NASDAQ:TTWO) is more popular among hedge funds. Our overall hedge fund sentiment score for TTWO is 77.7. 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. 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 returned 28.2% in 2020 through August 24th but still managed to beat the market by 20.6 percentage points. Hedge funds were also right about betting on TTWO as the stock returned 23.6% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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