Was The Smart Money Right About Adobe Inc. (ADBE)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Adobe Inc. (NASDAQ:ADBE).

Is Adobe Inc. (NASDAQ:ADBE) the right pick for your portfolio? Money managers were selling. The number of long hedge fund positions fell by 18 in recent months. Adobe Inc. (NASDAQ:ADBE) was in 89 hedge funds’ portfolios at the end of June. The all time high for this statistic is 115. Our calculations also showed that ADBE ranked 25th among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 107 hedge funds in our database with ADBE positions at the end of the first quarter.

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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. Recently we came across a high growth stock that has tons of hidden assets and is trading at an extremely cheap valuation. We go through lists like the 10 best growth stocks to buy to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind let’s take a look at the new hedge fund action encompassing Adobe Inc. (NASDAQ:ADBE).

Do Hedge Funds Think ADBE Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 89 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the first quarter of 2020. By comparison, 104 hedge funds held shares or bullish call options in ADBE a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, Fisher Asset Management held the most valuable stake in Adobe Inc. (NASDAQ:ADBE), which was worth $3634.7 million at the end of the second quarter. On the second spot was Lone Pine Capital which amassed $1415.5 million worth of shares. Arrowstreet Capital, Akre Capital Management, and GQG Partners 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 Keywise Capital Management allocated the biggest weight to Adobe Inc. (NASDAQ:ADBE), around 12.88% of its 13F portfolio. Center Lake Capital is also relatively very bullish on the stock, earmarking 10.95 percent of its 13F equity portfolio to ADBE.

Due to the fact that Adobe Inc. (NASDAQ:ADBE) has faced bearish sentiment from the entirety of the hedge funds we track, logic holds that there was a specific group of fund managers who were dropping their entire stakes in the second quarter. It’s worth mentioning that Rick Slocum’s Harvard Management Co said goodbye to the largest stake of the 750 funds tracked by Insider Monkey, comprising an estimated $155 million in stock, and Renaissance Technologies was right behind this move, as the fund said goodbye to about $140.8 million worth. These moves are important to note, as total hedge fund interest dropped by 18 funds in the second quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Adobe Inc. (NASDAQ:ADBE). We will take a look at Exxon Mobil Corporation (NYSE:XOM), Comcast Corporation (NASDAQ:CMCSA), Toyota Motor Corporation (NYSE:TM), NIKE, Inc. (NYSE:NKE), Netflix, Inc. (NASDAQ:NFLX), The Coca-Cola Company (NYSE:KO), and Verizon Communications Inc. (NYSE:VZ). This group of stocks’ market values are similar to ADBE’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 67 hedge funds with bullish positions and the average amount invested in these stocks was $9924 million. That figure was $13101 million in ADBE’s case. Netflix, Inc. (NASDAQ:NFLX) is the most popular stock in this table. On the other hand Toyota Motor Corporation (NYSE:TM) is the least popular one with only 12 bullish hedge fund positions. Adobe Inc. (NASDAQ:ADBE) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ADBE is 48.3. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 26.3% in 2021 through October 29th and still beat the market by 2.3 percentage points. Hedge funds were also right about betting on ADBE as the stock returned 11.1% since the end of Q2 (through 10/29) 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.