Is 2U Inc (TWOU) Going to Burn These Hedge Funds?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. In this article, we look at what those funds think of 2U Inc (NASDAQ:TWOU) based on that data.

Is 2U Inc (NASDAQ:TWOU) a buy, sell, or hold? Investors who are in the know are in a pessimistic mood. The number of bullish hedge fund bets decreased by 4 recently. Our calculations also showed that TWOU 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

To most market participants, hedge funds are viewed as unimportant, old investment vehicles of yesteryear. While there are over 8000 funds with their doors open today, We choose to focus on the moguls of this group, around 850 funds. These money managers shepherd bulk of the smart money’s total asset base, and by watching their first-class investments, Insider Monkey has determined various investment strategies that have historically defeated the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy exceeded the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Scott Ferguson Sachem Head Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology’s influence will go beyond online payments. So, we are checking out this futurist’s moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. With all of this in mind let’s take a gander at the key hedge fund action surrounding 2U Inc (NASDAQ:TWOU).

Hedge fund activity in 2U Inc (NASDAQ:TWOU)

At Q1’s end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -22% from the previous quarter. By comparison, 19 hedge funds held shares or bullish call options in TWOU a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is TWOU A Good Stock To Buy?

The largest stake in 2U Inc (NASDAQ:TWOU) was held by Sachem Head Capital, which reported holding $60.1 million worth of stock at the end of September. It was followed by D E Shaw with a $55.9 million position. Other investors bullish on the company included Two Sigma Advisors, Duquesne Capital, and Balyasny Asset Management. In terms of the portfolio weights assigned to each position Sachem Head Capital allocated the biggest weight to 2U Inc (NASDAQ:TWOU), around 5.84% of its 13F portfolio. Islet Management is also relatively very bullish on the stock, dishing out 0.85 percent of its 13F equity portfolio to TWOU.

Because 2U Inc (NASDAQ:TWOU) has witnessed declining sentiment from hedge fund managers, logic holds that there exists a select few funds that slashed their full holdings by the end of the first quarter. Interestingly, Jonathan Auerbach’s Hound Partners cut the largest investment of the 750 funds watched by Insider Monkey, totaling close to $44.9 million in stock, and Josh Resnick’s Jericho Capital Asset Management was right behind this move, as the fund dropped about $19.2 million worth. These moves are interesting, as total hedge fund interest fell by 4 funds by the end of the first quarter.

Let’s now review hedge fund activity in other stocks similar to 2U Inc (NASDAQ:TWOU). We will take a look at Dicerna Pharmaceuticals Inc (NASDAQ:DRNA), Allegiant Travel Company (NASDAQ:ALGT), PROS Holdings, Inc. (NYSE:PRO), and Visteon Corp (NYSE:VC). This group of stocks’ market values resemble TWOU’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
DRNA 25 281860 -6
ALGT 19 252399 -5
PRO 16 151037 -4
VC 19 152241 -10
Average 19.75 209384 -6.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $209 million. That figure was $158 million in TWOU’s case. Dicerna Pharmaceuticals Inc (NASDAQ:DRNA) is the most popular stock in this table. On the other hand PROS Holdings, Inc. (NYSE:PRO) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks 2U Inc (NASDAQ:TWOU) is even less popular than PRO. Hedge funds clearly dropped the ball on TWOU as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 13.3% in 2020 through June 25th and still beat the market by 16.8 percentage points. A small number of hedge funds were also right about betting on TWOU as the stock returned 68.8% so far in 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.