This Metric Says You Are Smart to Sell Facebook Inc (FB)

Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked, during the third quarter. Among them, Valeant and Micron ranked among the top 30 picks and both lost around 20%. Citigroup, which was the third most popular stock, lost 10% amid uncertainty regarding the interest rates. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is Facebook Inc (NASDAQ:FB) a buy, sell, or hold? Prominent investors are in a pessimistic mood. The number of long hedge fund positions shrunk by 5 recently.

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If you’d ask most market participants, hedge funds are seen as worthless, old investment tools of years past. While there are over 8000 funds trading at present, Experts at Insider Monkey, a website specializing in hedge funds, choose to focus on the top tier of this group, around 700 funds. These investment expertsdirect most of all hedge funds’ total capital, and by observing their inimitable equity investments, Insider Monkey has deciphered several investment strategies that have historically surpassed the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy beat the S&P 500 index by 18 percentage points annually for a decade in their back tests.

Keeping this in mind, we’re going to take a look at the latest action encompassing Facebook Inc (NASDAQ:FB).

What does the smart money think about Facebook Inc (NASDAQ:FB)?

Heading into Q4, a total of 128 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the second quarter. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes meaningfully.

According to the hedge fund intelligence website Insider Monkey, Stephen Mandel’s Lone Pine Capital had the largest position in Facebook Inc (NASDAQ:FB), worth close to $962.1 million, corresponding to 3.9% of its total 13F portfolio. Sitting at the No. 2 spot is Philippe Laffont of Coatue Management, with a $674.6 million position; 7.6% of its 13F portfolio is allocated to the stock. Some other hedge funds that are bullish encompass D. E. Shaw’s D E Shaw, John Armitage’s Egerton Capital Limited and Stanley Druckenmiller’s Duquesne Capital.

Due to the fact that Facebook Inc (NASDAQ:FB) has experienced falling interest from the smart money, we can see that there lies a certain “tier” of fund managers that elected to cut their entire stakes at the end of the first quarter. It’s worth mentioning that Eric W. Mandelblatt’s Soroban Capital Partners said goodbye to the biggest investment of the 700 funds tracked by Insider Monkey, worth close to $274.4 million in ‘Call’ options, and Paul Tudor Jones of Tudor Investment Corp was right behind this move, as the fund sold off about $196.4 million worth of shares. These bearish behaviors are interesting, as total hedge fund interest was cut by 5 funds at the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to Facebook Inc (NASDAQ:FB). These stocks are China Mobile Ltd. (ADR) (NYSE:CHL),, Inc. (NASDAQ:AMZN), Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCMKTS:NSRGY), and JPMorgan Chase & Co. (NYSE:JPM). This group of stocks’ market values are closest to FB’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x$1000) Change in HF Position
CHL 20 213813 -7
AMZN 113 14981060 10
NSRGY 5 1202191 -1
JPM 100 7748535 0

Even though Facebook registered a significant attention from the smart money heading into the fourth quarter, our data indicate that the interest toward the stock may be fading. Of course, this does not mean that you should certainly exit the stock, but some extra caution would not be a bad idea.

Disclosure: none