Hedge Funds’ This Stock Pick Debunked Naysayers

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. 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 even though the mainstream financial media journalists don’t agree with this approach. 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 Netflix, Inc. (NASDAQ:NFLX).

Netflix, Inc. (NASDAQ:NFLX) was in 114 hedge funds’ portfolios at the end of the fourth quarter of 2019. NFLX investors should pay attention to an increase in activity from the world’s largest hedge funds recently. There were 103 hedge funds in our database with NFLX holdings at the end of the previous quarter. Our calculations also showed that NFLX ranked 13th 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).

If you listen to the mainstream financial media, you should avoid stock picking and invest in low-cost index funds. This is indeed what you should do if you want to generate average returns. Mainstream financial media journalists try to make you believe that it isn’t possible to pick winners and losers, and you should ignore the stock picks of hedge fund managers. You may remember reading an article in the WSJ that said “random dart throwing monkeys beat hedge fund stars”. What they fail to tell you is that the top 5 hedge fund stocks returned more than 30% since the end of 2018 and beat the S&P 500 Index by nearly 25 percentage points. You can’t explain this kind of outperformance by luck or coincidence. WSJ will need an army of monkeys to throw darts and tens of thousands of attempts to match these returns.

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, this trader is claiming triple digit returns, so we check out his latest trade recommendations We are probably at the peak of the COVID-19 pandemic, so we check out this biotech investor’s coronavirus picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). 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 go over the recent hedge fund action surrounding Netflix, Inc. (NASDAQ:NFLX).

What does smart money think about Netflix, Inc. (NASDAQ:NFLX)?

At the end of the fourth quarter, a total of 114 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards NFLX over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Daniel Sundheim’s D1 Capital Partners has the number one position in Netflix, Inc. (NASDAQ:NFLX), worth close to $1.4181 billion, corresponding to 20.8% of its total 13F portfolio. Coming in second is Karthik Sarma of SRS Investment Management, with a $1.3267 billion position; the fund has 31.8% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism consist of Ken Griffin’s Citadel Investment Group, Andreas Halvorsen’s Viking Global and Lone Pine Capital. 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, dishing out 20.82 percent of its 13F equity portfolio to NFLX.

Consequently, key hedge funds were leading the bulls’ herd. Eagle Capital Management, managed by Boykin Curry, initiated the most outsized 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 new positions in the stock are Eashwar Krishnan’s Tybourne Capital Management, James Crichton’s Hitchwood Capital Management, and Robert Boucai’s Newbrook Capital Advisors.

Let’s check out 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 valuations are similar to NFLX’s market valuation.

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 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 lost 1.0% in 2020 through April 20th but still managed to beat the market by 11 percentage points. Hedge funds were also right about betting on NFLX as the stock returned 35.2% so far in 2020 (through April 20th) and outperformed the market by an even larger margin. We wonder how many of Wall Street Journal’s monkeys were able to throw the dart at Netflix!!
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.