Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Datadog, Inc. (NASDAQ:DDOG)? The smart money sentiment can provide an answer to this question.
Is DDOG a good stock to buy now? Money managers were getting less optimistic. The number of long hedge fund bets retreated by 15 in recent months. Datadog, Inc. (NASDAQ:DDOG) was in 42 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 57. Our calculations also showed that DDOG isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 57 hedge funds in our database with DDOG holdings at the end of June.
Video: 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 66 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.
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now let’s review the key hedge fund action regarding Datadog, Inc. (NASDAQ:DDOG).
Do Hedge Funds Think DDOG Is A Good Stock To Buy Now?
At the end of September, a total of 42 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -26% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards DDOG over the last 21 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Datadog, Inc. (NASDAQ:DDOG) was held by Lone Pine Capital, which reported holding $669 million worth of stock at the end of September. It was followed by Tiger Global Management LLC with a $486 million position. Other investors bullish on the company included Whale Rock Capital Management, Melvin Capital Management, and Coatue Management. In terms of the portfolio weights assigned to each position Stepstone Group allocated the biggest weight to Datadog, Inc. (NASDAQ:DDOG), around 64.65% of its 13F portfolio. Ashe Capital is also relatively very bullish on the stock, setting aside 7.19 percent of its 13F equity portfolio to DDOG.
Judging by the fact that Datadog, Inc. (NASDAQ:DDOG) has witnessed falling interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of hedge funds that slashed their entire stakes by the end of the third quarter. Interestingly, Steve Cohen’s Point72 Asset Management dumped the biggest position of the 750 funds tracked by Insider Monkey, comprising close to $52 million in stock. Yi Xin’s fund, Ariose Capital, also sold off its stock, about $13.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 15 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks similar to Datadog, Inc. (NASDAQ:DDOG). These stocks are Banco Santander, S.A. (NYSE:SAN), WEC Energy Group, Inc. (NYSE:WEC), The Bank of New York Mellon Corporation (NYSE:BK), Johnson Controls International plc (NYSE:JCI), Banco Bradesco SA (NYSE:BBD), Splunk Inc (NASDAQ:SPLK), and IQVIA Holdings, Inc. (NYSE:IQV). This group of stocks’ market valuations match DDOG’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.7 hedge funds with bullish positions and the average amount invested in these stocks was $1381 million. That figure was $2605 million in DDOG’s case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand Banco Santander, S.A. (NYSE:SAN) is the least popular one with only 14 bullish hedge fund positions. Datadog, Inc. (NASDAQ:DDOG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DDOG is 40.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 percentage points. These stocks gained 32.9% in 2020 through December 8th and beat the market again by 16.2 percentage points. Unfortunately DDOG wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on DDOG were disappointed as the stock returned -2.3% since the end of September (through 12/8) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.