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 Etsy Inc (NASDAQ:ETSY).
Etsy Inc (NASDAQ:ETSY) has seen a decrease in enthusiasm from smart money of late. ETSY was in 46 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 49 hedge funds in our database with ETSY holdings at the end of the previous quarter. Our calculations also showed that ETSY 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).
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 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. 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.
David E. Shaw of D.E. Shaw
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 go over the key hedge fund action regarding Etsy Inc (NASDAQ:ETSY).
Hedge fund activity in Etsy Inc (NASDAQ:ETSY)
Heading into the first quarter of 2020, a total of 46 of the hedge funds tracked by Insider Monkey were long this stock, a change of -6% from the third quarter of 2019. By comparison, 39 hedge funds held shares or bullish call options in ETSY a year ago. With hedgies’ capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Etsy Inc (NASDAQ:ETSY), with a stake worth $251.7 million reported as of the end of September. Trailing Renaissance Technologies was Cadian Capital, which amassed a stake valued at $132.9 million. Half Sky Capital, D E Shaw, and Goodnow Investment Group 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 Half Sky Capital allocated the biggest weight to Etsy Inc (NASDAQ:ETSY), around 34.75% of its 13F portfolio. Greenhaven Road Investment Management is also relatively very bullish on the stock, earmarking 8.38 percent of its 13F equity portfolio to ETSY.
Seeing as Etsy Inc (NASDAQ:ETSY) has experienced declining sentiment from hedge fund managers, it’s easy to see that there were a few money managers who were dropping their full holdings last quarter. At the top of the heap, Gabriel Plotkin’s Melvin Capital Management dumped the largest stake of the 750 funds followed by Insider Monkey, comprising close to $84.8 million in stock. Josh Resnick’s fund, Jericho Capital Asset Management, also sold off its stock, about $66.5 million worth. These moves are interesting, as total hedge fund interest was cut by 3 funds last quarter.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Etsy Inc (NASDAQ:ETSY) but similarly valued. We will take a look at Healthequity Inc (NASDAQ:HQY), ServiceMaster Global Holdings Inc (NYSE:SERV), Trex Company, Inc. (NYSE:TREX), and Elastic N.V. (NYSE:ESTC). This group of stocks’ market valuations are closest to ETSY’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HQY | 23 | 163737 | 1 |
| SERV | 42 | 1197647 | 13 |
| TREX | 20 | 110539 | -1 |
| ESTC | 39 | 919990 | 8 |
| Average | 31 | 597978 | 5.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $598 million. That figure was $814 million in ETSY’s case. ServiceMaster Global Holdings Inc (NYSE:SERV) is the most popular stock in this table. On the other hand Trex Company, Inc. (NYSE:TREX) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Etsy Inc (NASDAQ:ETSY) is more popular among hedge funds. 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 managed to beat the market by 5.5 percentage points. Hedge funds were also right about betting on ETSY as the stock returned -6.8% so far in Q1 (through March 25th) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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.
