Hedge Funds Soured On Cloudflare, Inc. (NET) At The Wrong Time

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. After several tireless days we have finished crunching the numbers from nearly 835 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms’ equity portfolios as of December 31st. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards Cloudflare, Inc. (NYSE:NET).

Cloudflare, Inc. (NYSE:NET) has experienced a decrease in support from the world’s most elite money managers in recent months. NET was in 22 hedge funds’ portfolios at the end of December. There were 33 hedge funds in our database with NET holdings at the end of the previous quarter. Our calculations also showed that NET isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Charles Davidson - Wexford Capital

Charles Davidson of Wexford Capital

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s review the latest hedge fund action encompassing Cloudflare, Inc. (NYSE:NET).

How have hedgies been trading Cloudflare, Inc. (NYSE:NET)?

At the end of the fourth quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -33% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards NET over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is NET A Good Stock To Buy?

Among these funds, Greenspring Associates held the most valuable stake in Cloudflare, Inc. (NYSE:NET), which was worth $121.4 million at the end of the third quarter. On the second spot was Jericho Capital Asset Management which amassed $16 million worth of shares. Strycker View Capital, Wexford Capital, and Whetstone Capital Advisors 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 Greenspring Associates allocated the biggest weight to Cloudflare, Inc. (NYSE:NET), around 32.01% of its 13F portfolio. Strycker View Capital is also relatively very bullish on the stock, dishing out 6.88 percent of its 13F equity portfolio to NET.

Seeing as Cloudflare, Inc. (NYSE:NET) has experienced bearish sentiment from hedge fund managers, it’s easy to see that there is a sect of fund managers who sold off their full holdings in the third quarter. At the top of the heap, Andreas Halvorsen’s Viking Global dumped the largest investment of the 750 funds watched by Insider Monkey, worth about $27 million in stock. Ross Turner’s fund, Pelham Capital, also cut its stock, about $13.9 million worth. These moves are important to note, as total hedge fund interest was cut by 11 funds in the third quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Cloudflare, Inc. (NYSE:NET) but similarly valued. We will take a look at Essent Group Ltd (NYSE:ESNT), Hawaiian Electric Industries, Inc. (NYSE:HE), DCP Midstream LP (NYSE:DCP), and RealPage, Inc. (NASDAQ:RP). This group of stocks’ market valuations are closest to NET’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ESNT 36 327183 12
HE 17 175734 3
DCP 6 18020 2
RP 36 603605 0
Average 23.75 281136 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.75 hedge funds with bullish positions and the average amount invested in these stocks was $281 million. That figure was $205 million in NET’s case. Essent Group Ltd (NYSE:ESNT) is the most popular stock in this table. On the other hand DCP Midstream LP (NYSE:DCP) is the least popular one with only 6 bullish hedge fund positions. Cloudflare, Inc. (NYSE:NET) is not the least popular stock in this group but hedge fund interest is still below average. 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 lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on NET as the stock returned 27% during the same time period and outperformed the market by an even larger margin.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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