Were Hedge Funds Right About Crowding Into DraftKings Inc. (DKNG)?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of DraftKings Inc. (NASDAQ:DKNG).

Is DraftKings Inc. (NASDAQ:DKNG) a marvelous investment right now? Prominent investors were buying. The number of bullish hedge fund positions advanced by 18 recently. DraftKings Inc. (NASDAQ:DKNG) was in 53 hedge funds’ portfolios at the end of June. The all time high for this statistics is 35. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that DKNG 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.

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 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Navroz Udwadia - Falcon Edge Capital

Navroz D. Udwadia of Falcon Edge Capital

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. Now let’s view the new hedge fund action regarding DraftKings Inc. (NASDAQ:DKNG).

How have hedgies been trading DraftKings Inc. (NASDAQ:DKNG)?

At second quarter’s end, a total of 53 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 51% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in DKNG a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Park West Asset Management was the largest shareholder of DraftKings Inc. (NASDAQ:DKNG), with a stake worth $125.6 million reported as of the end of September. Trailing Park West Asset Management was Hudson Bay Capital Management, which amassed a stake valued at $91.3 million. Soros Fund Management, Falcon Edge Capital, and Arrowstreet Capital 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 Toscafund Asset Management allocated the biggest weight to DraftKings Inc. (NASDAQ:DKNG), around 10.13% of its 13F portfolio. Kayak Investment Partners is also relatively very bullish on the stock, designating 6.52 percent of its 13F equity portfolio to DKNG.

As aggregate interest increased, some big names have jumped into DraftKings Inc. (NASDAQ:DKNG) headfirst. Park West Asset Management, managed by Peter S. Park, established the most valuable position in DraftKings Inc. (NASDAQ:DKNG). Park West Asset Management had $125.6 million invested in the company at the end of the quarter. George Soros’s Soros Fund Management also made a $82.5 million investment in the stock during the quarter. The following funds were also among the new DKNG investors: Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Anand Parekh’s Alyeska Investment Group, and Noam Gottesman’s GLG Partners.

Let’s check out hedge fund activity in other stocks similar to DraftKings Inc. (NASDAQ:DKNG). We will take a look at PerkinElmer, Inc. (NYSE:PKI), Cloudflare, Inc. (NYSE:NET), Horizon Therapeutics Public Limited Company (NASDAQ:HZNP), ABIOMED, Inc. (NASDAQ:ABMD), Pool Corporation (NASDAQ:POOL), KB Financial Group, Inc. (NYSE:KB), and Alteryx, Inc. (NYSE:AYX). This group of stocks’ market values match DKNG’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PKI 30 1263237 9
NET 36 456001 12
HZNP 45 2955360 4
ABMD 31 823991 4
POOL 35 492145 2
KB 6 36329 -1
AYX 48 1612975 5
Average 33 1091434 5

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 $1091 million. That figure was $694 million in DKNG’s case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand KB Financial Group, Inc. (NYSE:KB) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks DraftKings Inc. (NASDAQ:DKNG) is more popular among hedge funds. Our overall hedge fund sentiment score for DKNG 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 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 DKNG as the stock returned 28.5% 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.

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