Hedge Funds Piled Into Netflix, Inc. (NFLX) Even Before Coronavirus Surfaced

Is Netflix, Inc. (NASDAQ:NFLX) a good equity to bet on right now? We know coronavirus is probably the #1 concern in your mind right now. It should be. We estimate that COVID-19 will kill around 5 million people worldwide and there is actually a 3.3% probability that president Donald Trump will die from the new coronavirus (see the details). Coronavirus will probably cause a short recession and then things will get back to business as usual. That’s why we believe you should use this opportunity to identify the best stocks to invest for the future and add them to your portfolio at increasingly attractive prices. How do we find high quality stocks? We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Netflix, Inc. (NASDAQ:NFLX) going to take off soon? Money managers are in a bullish mood. The number of bullish hedge fund positions advanced by 11 in recent months. Our calculations also showed that NFLX currently ranks 13th among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). NFLX was in 114 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 103 hedge funds in our database with NFLX positions at the end of the previous quarter. Hedge fund sentiment towards Netflix is currently at its all time high.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 41 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.

Daniel Sundheim D1 Capital

Daniel Sundheim of D1 Capital Partners

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind we’re going to take a gander at the fresh hedge fund action surrounding Netflix, Inc. (NASDAQ:NFLX).

How have hedgies been trading Netflix, Inc. (NASDAQ:NFLX)?

Heading into the first quarter of 2020, a total of 114 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from one quarter earlier. On the other hand, there were a total of 83 hedge funds with a bullish position in NFLX a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, D1 Capital Partners held the most valuable stake in Netflix, Inc. (NASDAQ:NFLX), which was worth $1418.1 million at the end of the third quarter. On the second spot was SRS Investment Management which amassed $1326.7 million worth of shares. Citadel Investment Group, Viking Global, and Lone Pine Capital 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 SRS Investment Management allocated the biggest weight to Netflix, Inc. (NASDAQ:NFLX), around 31.76% of its 13F portfolio. D1 Capital Partners is also relatively very bullish on the stock, designating 20.82 percent of its 13F equity portfolio to NFLX.

As industrywide interest jumped, some big names were breaking ground themselves. Eagle Capital Management, managed by Boykin Curry, assembled the biggest position in Netflix, Inc. (NASDAQ:NFLX). Eagle Capital Management had $615.7 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also initiated a $176.8 million position during the quarter. The other funds with brand new NFLX positions are Eashwar Krishnan’s Tybourne Capital Management, James Crichton’s Hitchwood Capital Management, and Robert Boucai’s Newbrook Capital Advisors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Netflix, Inc. (NASDAQ:NFLX) but similarly valued. These stocks are BHP Group (NYSE:BHP), Novo Nordisk A/S (NYSE:NVO), Accenture Plc (NYSE:ACN), and Philip Morris International Inc. (NYSE:PM). This group of stocks’ market caps are similar to NFLX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BHP 20 886421 -4
NVO 23 2935902 2
ACN 41 1208829 -4
PM 57 3240766 -3
Average 35.25 2067980 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.25 hedge funds with bullish positions and the average amount invested in these stocks was $2068 million. That figure was $13081 million in NFLX’s case. Philip Morris International Inc. (NYSE:PM) is the most popular stock in this table. On the other hand BHP Group (NYSE:BHP) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Netflix, Inc. (NASDAQ:NFLX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks also gained 0.1% in 2020 through March 2nd and beat the market by 4.1 percentage points. Hedge funds were also right about betting on NFLX as the stock returned 17.8% so far in Q1 (through March 2nd) 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.

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