At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Upwork Inc. (NASDAQ:UPWK) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Upwork Inc. (NASDAQ:UPWK) was in 25 hedge funds’ portfolios at the end of June. The all time high for this statistics is 24. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. UPWK shareholders have witnessed an increase in enthusiasm from smart money in recent months. There were 22 hedge funds in our database with UPWK positions at the end of the first quarter. Our calculations also showed that UPWK isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. With all of this in mind let’s go over the recent hedge fund action surrounding Upwork Inc. (NASDAQ:UPWK).
What does smart money think about Upwork Inc. (NASDAQ:UPWK)?
At the end of June, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the first quarter of 2020. By comparison, 10 hedge funds held shares or bullish call options in UPWK 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.
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Quincy Lee’s Ancient Art (Teton Capital) has the largest position in Upwork Inc. (NASDAQ:UPWK), worth close to $63.3 million, corresponding to 11.6% of its total 13F portfolio. Sitting at the No. 2 spot is Hawk Ridge Management, led by David Brown, holding a $49.5 million position; 5.1% of its 13F portfolio is allocated to the company. Some other peers that hold long positions contain Richard Driehaus’s Driehaus Capital, Israel Englander’s Millennium Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Ancient Art (Teton Capital) allocated the biggest weight to Upwork Inc. (NASDAQ:UPWK), around 11.63% of its 13F portfolio. Hawk Ridge Management is also relatively very bullish on the stock, setting aside 5.11 percent of its 13F equity portfolio to UPWK.
Now, key money managers have been driving this bullishness. Driehaus Capital, managed by Richard Driehaus, initiated the most outsized position in Upwork Inc. (NASDAQ:UPWK). Driehaus Capital had $17.7 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $12.1 million position during the quarter. The other funds with new positions in the stock are George Baxter’s Sabrepoint Capital, Robert Rodriguez and Steven Romick’s First Pacific Advisors LLC, and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s now review hedge fund activity in other stocks similar to Upwork Inc. (NASDAQ:UPWK). These stocks are Verra Mobility Corporation (NASDAQ:VRRM), Hilton Grand Vacations Inc. (NYSE:HGV), Hilltop Holdings Inc. (NYSE:HTH), 8×8, Inc. (NYSE:EGHT), Onto Innovation Inc. (NYSE:ONTO), Compass Minerals International, Inc. (NYSE:CMP), and Osisko Gold Royalties Ltd (NYSE:OR). This group of stocks’ market valuations are similar to UPWK’s market valuation.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
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As you can see these stocks had an average of 21.3 hedge funds with bullish positions and the average amount invested in these stocks was $242 million. That figure was $236 million in UPWK’s case. Hilton Grand Vacations Inc. (NYSE:HGV) is the most popular stock in this table. On the other hand Osisko Gold Royalties Ltd (NYSE:OR) is the least popular one with only 15 bullish hedge fund positions. Upwork Inc. (NASDAQ:UPWK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for UPWK is 71.3. 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. 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 21.3% in 2020 through September 25th and still beat the market by 17.7 percentage points. Hedge funds were also right about betting on UPWK as the stock returned 15.7% during Q3 (through September 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.