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New Milestone Supports Hedge Fund Sentiments Towards Facebook and Twitter

Facebook Inc (NASDAQ:FB)’s stock has edged higher in today’s morning trading, after it announced a milestone for Instagram that puts the image-focused social network above Twitter Inc (NYSE:TWTR) in terms of the number of users. According to a post on the official Instagram blog, the social network currently has 400 million users. According to Twitter, it currently has 316 million monthly active users, far lower than the reported figure for Instagram. The milestone may be even more poignant for the struggling Twitter taking into account that it tried to acquire Instagram three years ago, before Facebook landed the deal for $1 billion. The event appears to validate why hedge funds love Facebook more than Twitter as evidenced in our list of hedge funds’ most popular stocks where Facebook ranked third.

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At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically delivered a monthly alpha of six basis points, though these stocks underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P500 Index by an average of 95 basis points per month (read more details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning 118% and beating the market by more than 60 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise rather than large-cap stocks.

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The sentiment of hedge funds towards Facebook was supported by analysts as well. Back in June, RBC Capital Markets’ Mark Mahaney said that video and Instagram will be key growth engines for Facebook Inc (NASDAQ:FB) in the coming quarters. Reiterating an “Outperform” rating on the stock with a price target of $105.00 then, still an over 10% upside to the stock’s current price, Mahaney said that Wall Street’s growth estimate for Facebook over the next 12 months may still be conservative, especially taking into account its revenue base and potential. Considering the fresh news from Instagram, more and more people may be inclined to believe Mahaney.

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