Were Hedge Funds Right About Crowding Into Twilio Inc. (TWLO)?

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 Twilio Inc. (NYSE:TWLO).

Twilio Inc. (NYSE:TWLO) investors should be aware of an increase in enthusiasm from smart money of late. Twilio Inc. (NYSE:TWLO) was in 66 hedge funds’ portfolios at the end of June. The all time high for this statistics is 63. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that TWLO 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. Now we’re going to take a look at the recent hedge fund action surrounding Twilio Inc. (NYSE:TWLO).

What have hedge funds been doing with Twilio Inc. (NYSE:TWLO)?

Heading into the third quarter of 2020, a total of 66 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 27% from the first quarter of 2020. By comparison, 63 hedge funds held shares or bullish call options in TWLO a year ago. With hedgies’ sentiment swirling, there exists a few noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Among these funds, SCGE Management held the most valuable stake in Twilio Inc. (NYSE:TWLO), which was worth $610.7 million at the end of the third quarter. On the second spot was Foxhaven Asset Management which amassed $534.1 million worth of shares. Tiger Global Management LLC, Alkeon Capital Management, and Generation Investment Management 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 Foxhaven Asset Management allocated the biggest weight to Twilio Inc. (NYSE:TWLO), around 17.94% of its 13F portfolio. SCGE Management is also relatively very bullish on the stock, setting aside 11.79 percent of its 13F equity portfolio to TWLO.

As aggregate interest increased, key hedge funds were leading the bulls’ herd. Alkeon Capital Management, managed by Panayotis Takis Sparaggis, created the largest position in Twilio Inc. (NYSE:TWLO). Alkeon Capital Management had $263.9 million invested in the company at the end of the quarter. Gabriel Plotkin’s Melvin Capital Management also initiated a $142.6 million position during the quarter. The other funds with new positions in the stock are Israel Englander’s Millennium Management, Dmitry Balyasny’s Balyasny Asset Management, and James Crichton’s Hitchwood Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Twilio Inc. (NYSE:TWLO) but similarly valued. We will take a look at Cognizant Technology Solutions Corp (NASDAQ:CTSH), Chunghwa Telecom Co., Ltd (NYSE:CHT), The Allstate Corporation (NYSE:ALL), Match Group, Inc. (NASDAQ:MTCH), Ross Stores, Inc. (NASDAQ:ROST), Dow Inc. (NYSE:DOW), and KLA Corporation (NASDAQ:KLAC). This group of stocks’ market caps are similar to TWLO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.7 hedge funds with bullish positions and the average amount invested in these stocks was $1120 million. That figure was $3725 million in TWLO’s case. Ross Stores, Inc. (NASDAQ:ROST) 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 4 bullish hedge fund positions. Compared to these stocks Twilio Inc. (NYSE:TWLO) is more popular among hedge funds. Our overall hedge fund sentiment score for TWLO 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 TWLO as the stock returned 48.8% 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.