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Hedge Funds Were Dumping Zoom Video Communications, Inc. (ZM) Before The Coronavirus

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (read our latest 10 coronavirus predictions).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 835 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article we look at what those investors think of Zoom Video Communications, Inc. (NASDAQ:ZM).

Zoom Video Communications, Inc. (NASDAQ:ZM) investors should pay attention to a decrease in support from the world’s most elite money managers of late. Our calculations also showed that ZM isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).

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 S&P 500 ETFs by 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.

Lei Zhang Hillhouse Capital

Lei Zhang of Hillhouse Capital Management

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. Now we’re going to take a gander at the key hedge fund action regarding Zoom Video Communications, Inc. (NASDAQ:ZM).

How are hedge funds trading Zoom Video Communications, Inc. (NASDAQ:ZM)?

At Q4’s end, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZM over the last 18 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Lei Zhang’s Hillhouse Capital Management has the largest position in Zoom Video Communications, Inc. (NASDAQ:ZM), worth close to $470.6 million, corresponding to 5.9% of its total 13F portfolio. Coming in second is Tiger Global Management LLC, led by Chase Coleman, holding a $83.5 million position; the fund has 0.5% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish include Leonard A. Potter’s Wildcat Capital Management, Colin Moran’s Abdiel Capital Advisors and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Wildcat Capital Management allocated the biggest weight to Zoom Video Communications, Inc. (NASDAQ:ZM), around 22.37% of its 13F portfolio. Thrive Capital is also relatively very bullish on the stock, designating 14.09 percent of its 13F equity portfolio to ZM.

Seeing as Zoom Video Communications, Inc. (NASDAQ:ZM) has witnessed declining sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few hedgies who were dropping their entire stakes by the end of the third quarter. At the top of the heap, Alex Sacerdote’s Whale Rock Capital Management sold off the biggest position of the 750 funds watched by Insider Monkey, valued at about $101 million in stock, and Philippe Laffont’s Coatue Management was right behind this move, as the fund dropped about $86.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 5 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Zoom Video Communications, Inc. (NASDAQ:ZM) but similarly valued. These stocks are Incyte Corporation (NASDAQ:INCY), Sea Limited (NYSE:SE), Alexandria Real Estate Equities Inc (NYSE:ARE), and DISH Network Corp. (NASDAQ:DISH). This group of stocks’ market valuations match ZM’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INCY 46 3965633 11
SE 76 3911536 7
ARE 21 297129 -4
DISH 41 1617687 3
Average 46 2447996 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $2448 million. That figure was $858 million in ZM’s case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand Alexandria Real Estate Equities Inc (NYSE:ARE) is the least popular one with only 21 bullish hedge fund positions. Zoom Video Communications, Inc. (NASDAQ:ZM) 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 22.3% in 2020 through March 16th but still beat the market by 3.2 percentage points. A small number of hedge funds were also right about betting on ZM as the stock returned 58.5% 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.

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