Was The Smart Money Right About Piling Into Etsy Inc (ETSY)?

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 Etsy Inc (NASDAQ:ETSY).

Is Etsy Inc (NASDAQ:ETSY) a healthy stock for your portfolio? Prominent investors were getting more optimistic. The number of bullish hedge fund bets moved up by 5 in recent months. Etsy Inc (NASDAQ:ETSY) was in 43 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 49. Our calculations also showed that ETSY isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 38 hedge funds in our database with ETSY positions at the end of the first quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind let’s view the fresh hedge fund action regarding Etsy Inc (NASDAQ:ETSY).

What have hedge funds been doing with Etsy Inc (NASDAQ:ETSY)?

Heading into the third quarter of 2020, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ETSY over the last 20 quarters. With hedgies’ sentiment swirling, there exists a select group of key hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Among these funds, Renaissance Technologies held the most valuable stake in Etsy Inc (NASDAQ:ETSY), which was worth $473.9 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $224.3 million worth of shares. D E Shaw, Cadian Capital, and Citadel Investment Group 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 Half Sky Capital allocated the biggest weight to Etsy Inc (NASDAQ:ETSY), around 18.03% of its 13F portfolio. Goodnow Investment Group is also relatively very bullish on the stock, setting aside 13.41 percent of its 13F equity portfolio to ETSY.

Now, key money managers have jumped into Etsy Inc (NASDAQ:ETSY) headfirst. Light Street Capital, managed by Glen Kacher, initiated the most outsized position in Etsy Inc (NASDAQ:ETSY). Light Street Capital had $77.1 million invested in the company at the end of the quarter. Cliff Asness’s AQR Capital Management also made a $20.7 million investment in the stock during the quarter. The following funds were also among the new ETSY investors: Leonard Green’s Leonard Green & Partners, Seth Wunder’s Black-and-White Capital, and Harry Gail’s Harspring Capital Management.

Let’s check out hedge fund activity in other stocks similar to Etsy Inc (NASDAQ:ETSY). These stocks are Genuine Parts Company (NYSE:GPC), Sarepta Therapeutics Inc (NASDAQ:SRPT), Hewlett Packard Enterprise Company (NYSE:HPE), Grifols SA (NASDAQ:GRFS), Nucor Corporation (NYSE:NUE), FactSet Research Systems Inc. (NYSE:FDS), and Seagate Technology plc (NASDAQ:STX). This group of stocks’ market caps are closest to ETSY’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.4 hedge funds with bullish positions and the average amount invested in these stocks was $712 million. That figure was $1727 million in ETSY’s case. Sarepta Therapeutics Inc (NASDAQ:SRPT) is the most popular stock in this table. On the other hand Genuine Parts Company (NYSE:GPC) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks Etsy Inc (NASDAQ:ETSY) is more popular among hedge funds. Our overall hedge fund sentiment score for ETSY is 86.3. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on ETSY as the stock returned 29.8% since the end of June (through 10/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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