Was The Smart Money Right About Datadog, Inc. (DDOG)?

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 Datadog, Inc. (NASDAQ:DDOG).

Is Datadog, Inc. (NASDAQ:DDOG) the right pick for your portfolio? Prominent investors were in an optimistic mood. The number of bullish hedge fund bets went up by 10 lately. Datadog, Inc. (NASDAQ:DDOG) was in 52 hedge funds’ portfolios at the end of December. The all time high for this statistic is 57. Our calculations also showed that DDOG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 42 hedge funds in our database with DDOG positions at the end of the third quarter.

To the average investor there are plenty of methods market participants put to use to evaluate stocks. Some of the less known methods are hedge fund and insider trading interest. Our experts have shown that, historically, those who follow the top picks of the top fund managers can outclass their index-focused peers by a healthy margin (see the details here). Also, our monthly newsletter’s portfolio of long stock picks returned 197% since March 2017 (through March 2021) and beat the S&P 500 Index by 124 percentage points. You can download a sample issue of this newsletter on our website .

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks 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. Now we’re going to review the recent hedge fund action encompassing Datadog, Inc. (NASDAQ:DDOG).

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

Heading into the first quarter of 2021, a total of 52 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the previous quarter. The graph below displays the number of hedge funds with bullish position in DDOG over the last 22 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in Datadog, Inc. (NASDAQ:DDOG) was held by Lone Pine Capital, which reported holding $698 million worth of stock at the end of December. It was followed by Tiger Global Management LLC with a $468.3 million position. Other investors bullish on the company included D1 Capital Partners, Whale Rock Capital Management, and Coatue Management. In terms of the portfolio weights assigned to each position Stepstone Group allocated the biggest weight to Datadog, Inc. (NASDAQ:DDOG), around 69.01% of its 13F portfolio. Ashe Capital is also relatively very bullish on the stock, setting aside 6.72 percent of its 13F equity portfolio to DDOG.

As industrywide interest jumped, key money managers were breaking ground themselves. D1 Capital Partners, managed by Daniel Sundheim, established the most valuable position in Datadog, Inc. (NASDAQ:DDOG). D1 Capital Partners had $385.5 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $55.6 million position during the quarter. The other funds with brand new DDOG positions are James Crichton’s Hitchwood Capital Management, Hamilton Helmer’s Strategy Capital, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s also examine hedge fund activity in other stocks similar to Datadog, Inc. (NASDAQ:DDOG). These stocks are Chunghwa Telecom Co., Ltd (NYSE:CHT), PACCAR Inc (NASDAQ:PCAR), Bilibili Inc. (NASDAQ:BILI), Eversource Energy (NYSE:ES), Public Service Enterprise Group Incorporated (NYSE:PEG), Otis Worldwide Corporation (NYSE:OTIS), and Rockwell Automation Inc. (NYSE:ROK). This group of stocks’ market valuations match DDOG’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1099 million. That figure was $2899 million in DDOG’s case. Otis Worldwide Corporation (NYSE:OTIS) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 5 bullish hedge fund positions. Datadog, Inc. (NASDAQ:DDOG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for DDOG is 80.9. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and beat the market again by 1.6 percentage points. Unfortunately DDOG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DDOG were disappointed as the stock returned -12.9% since the end of December (through 4/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

Disclosure: None. This article was originally published at Insider Monkey.