In this article we are going to use hedge fund sentiment as a tool and determine whether Zoom Video Communications, Inc. (NASDAQ:ZM) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.
Is Zoom (ZM) a good stock to buy now? Prominent investors were turning bullish. The number of bullish hedge fund bets moved up by 8 lately. Zoom Video Communications, Inc. (NASDAQ:ZM) was in 56 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 48. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ZM 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).
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, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium 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. With all of this in mind we’re going to view the recent hedge fund action regarding Zoom Video Communications, Inc. (NASDAQ:ZM).
What have hedge funds been doing with Zoom Video Communications, Inc. (NASDAQ:ZM)?
At the end of September, a total of 56 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ZM 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.
More specifically, Renaissance Technologies was the largest shareholder of Zoom Video Communications, Inc. (NASDAQ:ZM), with a stake worth $2467.1 million reported as of the end of September. Trailing Renaissance Technologies was Hillhouse Capital Management, which amassed a stake valued at $2356.2 million. Coatue Management, Citadel Investment Group, and Tiger Global Management LLC 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 Hillhouse Capital Management allocated the biggest weight to Zoom Video Communications, Inc. (NASDAQ:ZM), around 17.85% of its 13F portfolio. Strategy Capital is also relatively very bullish on the stock, setting aside 11.21 percent of its 13F equity portfolio to ZM.
Now, specific money managers have been driving this bullishness. AQR Capital Management, managed by Cliff Asness, initiated the most outsized position in Zoom Video Communications, Inc. (NASDAQ:ZM). AQR Capital Management had $135.7 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $36.3 million position during the quarter. The following funds were also among the new ZM investors: Matthew Hulsizer’s PEAK6 Capital Management, Daniel Patrick Gibson’s Sylebra Capital Management, and Michel Massoud’s Melqart Asset Management.
Let’s go over hedge fund activity in other stocks similar to Zoom Video Communications, Inc. (NASDAQ:ZM). These stocks are Union Pacific Corporation (NYSE:UNP), QUALCOMM, Incorporated (NASDAQ:QCOM), China Mobile Limited (NYSE:CHL), Texas Instruments Incorporated (NASDAQ:TXN), BHP Group (NYSE:BHP), Charter Communications, Inc. (NASDAQ:CHTR), and Sanofi (NASDAQ:SNY). All of these stocks’ market caps are closest to ZM’s market cap.
|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 50.3 hedge funds with bullish positions and the average amount invested in these stocks was $3276 million. That figure was $9721 million in ZM’s case. Charter Communications, Inc. (NASDAQ:CHTR) is the most popular stock in this table. On the other hand China Mobile Limited (NYSE:CHL) is the least popular one with only 10 bullish hedge fund positions. Zoom Video Communications, Inc. (NASDAQ:ZM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ZM is 69.5. 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 31.6% in 2020 through December 2nd and beat the market again by 16 percentage points. Unfortunately ZM wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ZM were disappointed as the stock returned -12.2% since the end of September (through 12/2) 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.
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Disclosure: None. This article was originally published at Insider Monkey.