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Hedge Funds Dropped The Ball On Splunk Inc (SPLK)

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 Splunk Inc (NASDAQ:SPLK) and determine whether hedge funds had an edge regarding this stock.

Is Splunk Inc (NASDAQ:SPLK) a buy, sell, or hold? Investors who are in the know were selling. The number of bullish hedge fund bets were trimmed by 1 in recent months. Our calculations also showed that SPLK isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). SPLK was in 37 hedge funds’ portfolios at the end of the first quarter of 2020. There were 38 hedge funds in our database with SPLK positions at the end of the previous quarter.

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 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. 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.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a glance at the fresh hedge fund action regarding Splunk Inc (NASDAQ:SPLK).

Hedge fund activity in Splunk Inc (NASDAQ:SPLK)

Heading into the second quarter of 2020, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SPLK over the last 18 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.

Is SPLK A Good Stock To Buy?

The largest stake in Splunk Inc (NASDAQ:SPLK) was held by Iridian Asset Management, which reported holding $73.4 million worth of stock at the end of September. It was followed by Polar Capital with a $59.4 million position. Other investors bullish on the company included Citadel Investment Group, North Peak Capital, and Motley Fool Asset Management. In terms of the portfolio weights assigned to each position North Peak Capital allocated the biggest weight to Splunk Inc (NASDAQ:SPLK), around 15.6% of its 13F portfolio. Kayak Investment Partners is also relatively very bullish on the stock, earmarking 6.99 percent of its 13F equity portfolio to SPLK.

Due to the fact that Splunk Inc (NASDAQ:SPLK) has witnessed a decline in interest from the smart money, it’s safe to say that there exists a select few money managers that elected to cut their entire stakes last quarter. Interestingly, Josh Resnick’s Jericho Capital Asset Management dropped the biggest position of all the hedgies monitored by Insider Monkey, valued at about $103.6 million in stock, and Jacob Doft’s Highline Capital Management was right behind this move, as the fund sold off about $39.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 1 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Splunk Inc (NASDAQ:SPLK). These stocks are Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), ANSYS, Inc. (NASDAQ:ANSS), KKR & Co Inc. (NYSE:KKR), and Edison International (NYSE:EIX). All of these stocks’ market caps match SPLK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ALXN 56 3058097 8
ANSS 31 1059903 -2
KKR 48 2694120 -8
EIX 29 1046389 -5
Average 41 1964627 -1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 41 hedge funds with bullish positions and the average amount invested in these stocks was $1965 million. That figure was $340 million in SPLK’s case. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is the most popular stock in this table. On the other hand Edison International (NYSE:EIX) is the least popular one with only 29 bullish hedge fund positions. Splunk Inc (NASDAQ:SPLK) is not the least popular stock in this group but hedge fund interest is still below average. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on SPLK as the stock returned 57.4% during the second quarter and outperformed the market by an even larger margin.

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