Hedge Funds’ #3 Stock Pick Debunked Naysayers

“I have been following Dr. Inan Dogan since this outbreak, and he is  a phenomenally intelligent researcher. One month ago, Dr. Dogan’s prediction that the total U.S. death toll would be 20,000+ by April 15th was deemed “radical”. His Recession is Imminent article in February was very timely. Now he believes we could quickly end lockdowns in NYC after some simple testing. A must read” were the words used by our readers to describe our latest article.

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether Microsoft Corporation (NASDAQ:MSFT) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company even though the mainstream financial media journalists don’t agree with this approach. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Is Microsoft Corporation (NASDAQ:MSFT) a great stock to buy now? Investors who are in the know have been extremely bullish on Microsoft for years. Our calculations also showed that MSFT currently ranks 3rd 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). Microsoft has also been among the top 5 hedge fund picks since the end of 2018.

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.

Frank Brosens Taconic Capital

Frank Brosens of Taconic Capital

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. Now we’re going to go over the new hedge fund action surrounding Microsoft Corporation (NASDAQ:MSFT).

What have hedge funds been doing with Microsoft Corporation (NASDAQ:MSFT)?

At the end of the fourth quarter, a total of 189 of the hedge funds tracked by Insider Monkey were long this stock, a change of -1% from the third quarter of 2019. On the other hand, there were a total of 174 hedge funds with a bullish position in MSFT a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Fisher Asset Management was the largest shareholder of Microsoft Corporation (NASDAQ:MSFT), with a stake worth $3363.9 million reported as of the end of September. Trailing Fisher Asset Management was Eagle Capital Management, which amassed a stake valued at $2912 million. AQR Capital Management, Tiger Global Management LLC, and Adage Capital Management 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 Thrive Capital allocated the biggest weight to Microsoft Corporation (NASDAQ:MSFT), around 47.14% of its 13F portfolio. Joho Capital is also relatively very bullish on the stock, designating 20.99 percent of its 13F equity portfolio to MSFT.

Because Microsoft Corporation (NASDAQ:MSFT) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there is a sect of hedgies who were dropping their entire stakes heading into Q4. It’s worth mentioning that Robert Pohly’s Samlyn Capital cut the largest position of the “upper crust” of funds followed by Insider Monkey, totaling an estimated $110 million in stock, and Dan Loeb’s Third Point was right behind this move, as the fund dropped about $83.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Microsoft Corporation (NASDAQ:MSFT). We will take a look at Alphabet Inc (NASDAQ:GOOGL), Alphabet Inc (NASDAQ:GOOG), Amazon.com, Inc. (NASDAQ:AMZN), and Facebook Inc (NASDAQ:FB). This group of stocks’ market values resemble MSFT’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GOOGL 163 13078124 5
GOOG 148 16215698 0
AMZN 202 28001232 21
FB 198 24395049 6
Average 177.75 20422526 8

View table here if you experience formatting issues.

As you can see these stocks had an average of 177.75 hedge funds with bullish positions and the average amount invested in these stocks was $20423 million. That figure was $27423 million in MSFT’s case. Amazon.com, Inc. (NASDAQ:AMZN) is the most popular stock in this table. On the other hand Alphabet Inc (NASDAQ:GOOG) is the least popular one with only 148 bullish hedge fund positions. Microsoft Corporation (NASDAQ:MSFT) is not the most popular stock in this group but hedge fund interest is still above average. 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 beat the market by 11 percentage points. Hedge funds were also right about betting on MSFT as the stock returned 11.3% in 2020 (through April 20th) and outperformed the market. I wonder how naysayers will try to downplay this accomplishment.
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.