Hedge Funds Cashed Out of Spotify Technology S.A. (SPOT) Too Early

“Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn’t by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today’s darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn’t attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal,” said Vilas Fund in its Q1 investor letter. We aren’t sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards Spotify Technology S.A. (NYSE:SPOT).

Is Spotify Technology S.A. (NYSE:SPOT) undervalued? The best stock pickers are reducing their bets on the stock. The number of long hedge fund bets were trimmed by 5 recently. Our calculations also showed that SPOT isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). SPOT was in 37 hedge funds’ portfolios at the end of September. There were 42 hedge funds in our database with SPOT positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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

Chase Coleman of Tiger Global

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a peek at the latest hedge fund action regarding Spotify Technology S.A. (NYSE:SPOT).

What does smart money think about Spotify Technology S.A. (NYSE:SPOT)?

At the end of the third quarter, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -12% from the previous quarter. On the other hand, there were a total of 67 hedge funds with a bullish position in SPOT a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

No of Hedge Funds with SPOT Positions

The largest stake in Spotify Technology S.A. (NYSE:SPOT) was held by Tiger Global Management, which reported holding $463.1 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $168 million position. Other investors bullish on the company included Cadian Capital, Eminence Capital, and Tremblant Capital. In terms of the portfolio weights assigned to each position VGI Partners allocated the biggest weight to Spotify Technology S.A. (NYSE:SPOT), around 8.02% of its portfolio. Tremblant Capital is also relatively very bullish on the stock, designating 6.61 percent of its 13F equity portfolio to SPOT.

Since Spotify Technology S.A. (NYSE:SPOT) has faced falling interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of hedgies who sold off their entire stakes heading into Q4. Interestingly, Robert Pitts’s Steadfast Capital Management said goodbye to the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth about $175.2 million in stock. Aaron Cowen’s fund, Suvretta Capital Management, also cut its stock, about $138.4 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 5 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to Spotify Technology S.A. (NYSE:SPOT). These stocks are Fresenius Medical Care AG & Co. KGaA (NYSE:FMS), Ameren Corporation (NYSE:AEE), TAL Education Group (NYSE:TAL), and Match Group, Inc. (NASDAQ:MTCH). This group of stocks’ market caps are similar to SPOT’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FMS 5 3764 -4
AEE 30 1557458 12
TAL 20 1504129 -5
MTCH 41 1106508 10
Average 24 1042965 3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 24 hedge funds with bullish positions and the average amount invested in these stocks was $1043 million. That figure was $1470 million in SPOT’s case. Match Group, Inc. (NASDAQ:MTCH) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) is the least popular one with only 5 bullish hedge fund positions. Spotify Technology S.A. (NYSE:SPOT) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on SPOT as the stock returned 25% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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