Were Hedge Funds Right About Crowding Into Datadog, Inc. (DDOG)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Datadog, Inc. (NASDAQ:DDOG).

Is Datadog, Inc. (NASDAQ:DDOG) a splendid stock to buy now? Hedge funds were getting more optimistic. The number of bullish hedge fund positions moved up by 13 recently. Datadog, Inc. (NASDAQ:DDOG) was in 57 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that DDOG 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 44 hedge funds in our database with DDOG holdings at the end of March.

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

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a 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. Keeping this in mind let’s take a look at the fresh hedge fund action surrounding Datadog, Inc. (NASDAQ:DDOG).

How have hedgies been trading Datadog, Inc. (NASDAQ:DDOG)?

At the end of June, a total of 57 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 30% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards DDOG over the last 20 quarters. With hedge funds’ capital changing hands, there exists a few notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Lone Pine Capital, holds the most valuable position in Datadog, Inc. (NASDAQ:DDOG). Lone Pine Capital has a $594.1 million position in the stock, comprising 3% of its 13F portfolio. The second largest stake is held by Whale Rock Capital Management, led by Alex Sacerdote, holding a $471.1 million position; the fund has 3.8% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions contain Chase Coleman’s Tiger Global Management LLC, Renaissance Technologies and Philippe Laffont’s Coatue Management. In terms of the portfolio weights assigned to each position Stepstone Group allocated the biggest weight to Datadog, Inc. (NASDAQ:DDOG), around 83.87% of its 13F portfolio. Ariose Capital is also relatively very bullish on the stock, dishing out 9.75 percent of its 13F equity portfolio to DDOG.

With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. Lone Pine Capital, created the most valuable position in Datadog, Inc. (NASDAQ:DDOG). Lone Pine Capital had $594.1 million invested in the company at the end of the quarter. Yi Xin’s Ariose Capital also made a $13.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Bacon’s Moore Global Investments, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital, and Nancy Zevenbergen’s Zevenbergen Capital Investments.

Let’s go over hedge fund activity in other stocks similar to Datadog, Inc. (NASDAQ:DDOG). We will take a look at Hormel Foods Corporation (NYSE:HRL), PACCAR Inc (NASDAQ:PCAR), AFLAC Incorporated (NYSE:AFL), Suncor Energy Inc. (NYSE:SU), Sirius XM Holdings Inc (NASDAQ:SIRI), Cummins Inc. (NYSE:CMI), and Schlumberger Limited. (NYSE:SLB). All of these stocks’ market caps are closest to DDOG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.1 hedge funds with bullish positions and the average amount invested in these stocks was $649 million. That figure was $2363 million in DDOG’s case. Schlumberger Limited. (NYSE:SLB) is the most popular stock in this table. On the other hand Hormel Foods Corporation (NYSE:HRL) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Datadog, Inc. (NASDAQ:DDOG) is more popular among hedge funds. Our overall hedge fund sentiment score for DDOG is 90. 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 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on DDOG as the stock returned 29.2% since the end of June (through 10/16) 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.