The technology sector managed to outperform most other sectors and indices by a wide margin in 2016 and is continuing to do so this year. While last year the NASDAQ 100 Technology Sector Index gained 24% versus the S&P 500’s 9.5%, so far this year the former has appreciated by a further 14.18% whereas the S&P 500 is up by only 5.53%. This continuous outperformance of tech stocks has made common investors increasingly bullish on them. However, research done by Insider Monkey shows that hedge funds overall were becoming less optimistic on the space heading into 2017, especially on the larger names in the industry.
We follow over 700 hedge funds and other institutional investors and by analyzing their quarterly 13F filings, we identify stocks that they are collectively bullish on and develop investment strategies based on this data. One strategy that outperformed the market over the last year involves selecting the 100 best-performing funds and identifying the 30 mid-cap stocks that they are collectively the most bullish on. Over the past year, this strategy generated returns of 39.7%, topping the 24.1% gain registered by S&P 500 ETFs. Insider Monkey’s enhanced small-cap strategy registered gains of more than 45% over the last 12 months and outperformed SPY by more than 30 percentage points in the last 4.5 years (see details here).
Since we track the activity of over 700 hedge funds on a quarterly basis, it helps us gain insights into the broader trends being followed by smart money. One of the major insights that we were able to uncover from the fourth quarter hedge fund activity was that hedge funds as a whole were reducing their stakes in tech behemoths. Whether this selling was driven by a profit booking motive or less conviction on further growth of tech majors is too early to say. Nevertheless, we will keep our readers posted about this change in sentiment and its implications in our upcoming articles and Newsletters. Now, without further ado, let’s take a look at the five most popular technology companies among the hedge funds tracked by Insider Monkey going into 2017 and discuss the changes they experienced in their popularity among those funds during the fourth quarter.
#5 Apple Inc. (NASDAQ:AAPL)
– Hedge Funds with Long Positions (as of December 31, 2016): 113
– Value of Hedge Funds’ Holdings (as of December 31, 2016): $16.54 Billion
Technology giant Apple Inc. (NASDAQ:AAPL) saw a steep decline in its ownership among hedge funds during the fourth quarter, with the number of funds in our database that reported owning a stake in it falling by 32. However, the aggregate value of hedge funds’ holdings in the company increased by $321 million during that time. Apple Inc. (NASDAQ:AAPL)’s stock has been on fire since the start of 2017, appreciating by over 24%, and is currently trading very close to its lifetime high. Though the company currently pays a quarterly dividend of $0.57 per share, which in itself translates into an annual dividend yield of only 1.6%, some analysts think that the actual dividend yield of the stock is considerably higher. According to them, if one takes into account the amount that Apple spent on share repurchases last year in their dividend calculation, the actual forward yield of the stock is closer to 6.5%. Recent reports in Japanese publications suggest that Apple is among the companies that are bidding for Toshiba’s NAND flash memory unit, which will fetch an estimated price tag of over $18 billion.
#4 Amazon.com, Inc. (NASDAQ:AMZN)
– Hedge Funds with Long Positions (as of December 31, 2016): 123
– Value of Hedge Funds’ Holdings (as of December 31, 2016): $14.44 Billion
At the end of the third quarter, Amazon.com, Inc. (NASDAQ:AMZN) was the most popular stock overall, as well as the most popular tech stock among the hedge funds covered by Insider Monkey. However, with its ownership among those hedge funds dwindling by 27 during the fourth quarter and the aggregate value of their holdings falling by over $6 billion during that time, Amazon.com, Inc. (NASDAQ:AMZN) has toppled from its perch to fall to fourth among tech stocks as of the end of 2016.
Despite that declining interest among hedge funds, Amazon’s stock has continued its massive bull run in 2017, rising by 18.23% year-to-date. On March 30, the company announced that it will be shutting down its Quidsi Unit, which it had acquired in 2010 for $545 million. On March 30, Bloomberg reported that Amazon has invited key executives of some of the world’s largest packaged consumer goods brands to its headquarters in May in order to persuade them to bypass traditional retail channels for their products and instead sell directly on its website. At the end of last month, analysts at Barclays initiated coverage on Amazon’s stock with an ‘Overweight’ rating and $1,120 price target, implying potential upside of 30%.
#3 Microsoft Corporation (NASDAQ:MSFT)
– Hedge Funds with Long Positions (as of December 31, 2016): 126
– Value of Hedge Funds’ Holdings (as of December 31, 2016): $18.76 Billion
Although the number of hedge funds in our system that reported owning a stake in Microsoft Corporation (NASDAQ:MSFT) remained the same by the end of the fourth quarter as it was at the start, the aggregate value of their holdings in the company rose by $625 million during the quarter. Funds that boosted their stakes in the software giant during that period included Christopher Lyle’s SCGE Management and Michael Lowenstein’s Kensico Capital.
On the back of the rapid growth being displayed by its cloud platform Azure, which grew by 93% year-over-year, Microsoft Corporation (NASDAQ:MSFT) reported better-than-expected fiscal second quarter numbers earlier this year. The impressive financial performance by the company has translated well for its stock, which is currently trading up by 6% in 2017 and has more than doubled over the last five years. In order to compete with the sales and marketing offerings of Salesforce (NYSE:CRM) and Oracle (NYSE:ORCL), Microsoft revealed last month that it will be joining forces with Adobe. The two companies will create a shared data format between Microsoft’s sales software, called Dynamics, and Adobe’s marketing software suite, called Experience Cloud. On March 23, Microsoft announced that it has finished the development of a Windows 10 version customized for Chinese government use. Sales of the company’s products had taken a hit in the country after Beijing raised cybersecurity concerns related to them.
#2 Alphabet Inc (NASDAQ:GOOGL)
– Hedge Funds with Long Positions (as of December 31, 2016): 139
– Value of Hedge Funds’ Holdings (as of December 31, 2016): $14.62 Billion
Alphabet Inc (NASDAQ:GOOG)
– Hedge Funds with Long Positions (as of December 31, 2016): 126
– Value of Hedge Funds’ Holdings (as of December 31, 2016): $12.74 Billion
The number of hedge funds tracked by Insider Monkey that were long Alphabet Inc (NASDAQ:GOOGL) inched up by two during the fourth quarter, but those that were long Alphabet Inc (NASDAQ:GOOG) declined by 27 during the same time. The aggregate value of hedge funds holdings in both the Class A and Class C shares of Google’s holding company also dwindled during the fourth quarter. The aggregate value hedge fund’s Alphabet Inc (NASDAQ:GOOGL) holdings fell by $164 million during the fourth quarter, while hedgies’ holdings in Alphabet Inc (NASDAQ:GOOG) took a considerably larger hit in comparison, of nearly $1.5 billion.
Like the other tech stocks discussed previously, both classes of Alphabet Inc’s stock have also done well this year, with GOOGL currently trading up by 7% year-to-date and GOOG trading up by 7.5%. However, the shares of both classes of stock have taken a beating recently after issues concerning advertising on the company’s YouTube platform came up last month. Even though the company apologized for running customer’s ads on videos that were deemed objectionable, recent reports suggest that this issue is still not completely resolved and that Alphabet can’t guarantee the same won’t continue happening. According to most analysts, the ad crisis could have a big impact on YouTube’s revenue in the coming quarters, but won’t make a large dent in Alphabet Inc.’s financials, as YouTube still contributes only a fraction to the company’s top-line. On April 2, analysts at Aegis reiterated their ‘Buy’ rating and $1,011 price target on Alphabet.
#1 Facebook Inc (NASDAQ:FB)
– Hedge Funds with Long Positions (as of December 31, 2016): 146
– Value of Hedge Funds’ Holdings (as of December 31, 2016): $12.42 Billion
With Amazon losing considerable appeal among hedge funds during the fourth quarter, Facebook Inc (NASDAQ:FB) finally managed to become the most popular tech stock and the most popular stock overall at the end of 2016. However, the social networking giant also lost some of its popularity among hedge funds during the fourth quarter, with ownership of it declining by three and the aggregate value of hedge funds’ holdings in it falling by a whopping 23.66%. Hedge funds that reduced or sold off their stakes in Facebook Inc (NASDAQ:FB) during the final quarter of 2016 can’t be a happy bunch, considering that the tech giant’s stock has soared by over 22% this year and is currently trading at its lifetime high.
Facebook reached a major milestone last month after its photo sharing application, Instagram, crossed the one million active advertisers threshold. This achievement becomes even more impressive when one takes into account that Instagram only had around 200,000 active advertisers in March 2016 and that Twitter Inc (NYSE:TWTR) still has only 130,000 monthly active advertisers on its platform. On March 29, analysts at Barclays initiated coverage of Facebook’s with an ‘Overweight’ rating and called it “the best pure play in consumer Internet around the secular growth in mobile advertising, full stop.”