Was The Smart Money Right About Zoom Video Communications, Inc. (ZM)?

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 Zoom Video Communications, Inc. (NASDAQ:ZM).

Is Zoom Video Communications, Inc. (NASDAQ:ZM) the right pick for your portfolio? The smart money was getting more bullish. The number of long hedge fund positions inched up by 1 recently. Zoom Video Communications, Inc. (NASDAQ:ZM) was in 48 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 47. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that ZM 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).

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 most profitable companies in the world to pick the best large-cap 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 we’re going to view the recent hedge fund action surrounding Zoom Video Communications, Inc. (NASDAQ:ZM).

What does smart money think about Zoom Video Communications, Inc. (NASDAQ:ZM)?

Heading into the third quarter of 2020, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of 2% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ZM over the last 20 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Renaissance Technologies, founded by Jim Simons, holds the most valuable position in Zoom Video Communications, Inc. (NASDAQ:ZM). Renaissance Technologies has a $1.8397 billion position in the stock, comprising 1.6% of its 13F portfolio. On Renaissance Technologies’s heels is Lei Zhang of Hillhouse Capital Management, with a $1.7385 billion position; the fund has 15.9% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism encompass Philippe Laffont’s Coatue Management, Alex Sacerdote’s Whale Rock Capital Management and Lone Pine Capital. In terms of the portfolio weights assigned to each position Hillhouse Capital Management allocated the biggest weight to Zoom Video Communications, Inc. (NASDAQ:ZM), around 15.89% of its 13F portfolio. Abdiel Capital Advisors is also relatively very bullish on the stock, earmarking 8 percent of its 13F equity portfolio to ZM.

As one would reasonably expect, key hedge funds were breaking ground themselves. Lone Pine Capital, founded by Stephen Mandel, established the biggest position in Zoom Video Communications, Inc. (NASDAQ:ZM). Lone Pine Capital had $427.8 million invested in the company at the end of the quarter. Brian Ashford-Russell and Tim Woolley’s Polar Capital also initiated a $82.8 million position during the quarter. The other funds with brand new ZM positions are Amish Mehta’s SQN Investors, Glen Kacher’s Light Street Capital, and Alexander Captain’s Cat Rock Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Zoom Video Communications, Inc. (NASDAQ:ZM) but similarly valued. We will take a look at Becton, Dickinson and Company (NYSE:BDX), Rio Tinto Group (NYSE:RIO), Crown Castle International Corp. (NYSE:CCI), Cigna Corporation (NYSE:CI), Prologis Inc (NYSE:PLD), Caterpillar Inc. (NYSE:CAT), and Dominion Energy Inc. (NYSE:D). All of these stocks’ market caps resemble ZM’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 42.1 hedge funds with bullish positions and the average amount invested in these stocks was $1660 million. That figure was $6759 million in ZM’s case. Cigna Corporation (NYSE:CI) is the most popular stock in this table. On the other hand Rio Tinto Group (NYSE:RIO) is the least popular one with only 20 bullish hedge fund positions. Zoom Video Communications, Inc. (NASDAQ:ZM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ZM is 62.9. 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. 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 gained 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on ZM as the stock returned 101.8% since the end of Q2 (through 10/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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