Were Hedge Funds Right About Ditching MicroStrategy Incorporated (MSTR)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of MicroStrategy Incorporated (NASDAQ:MSTR) based on that data and determine whether they were really smart about the stock.

MicroStrategy Incorporated (NASDAQ:MSTR) has seen a decrease in support from the world’s most elite money managers in recent months. MSTR was in 18 hedge funds’ portfolios at the end of March. There were 25 hedge funds in our database with MSTR positions at the end of the previous quarter. Our calculations also showed that MSTR isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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 58 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.

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a peek at the recent hedge fund action regarding MicroStrategy Incorporated (NASDAQ:MSTR).

What does smart money think about MicroStrategy Incorporated (NASDAQ:MSTR)?

At Q1’s end, a total of 18 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -28% from the previous quarter. On the other hand, there were a total of 20 hedge funds with a bullish position in MSTR a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in MicroStrategy Incorporated (NASDAQ:MSTR) was held by Arrowstreet Capital, which reported holding $11.1 million worth of stock at the end of September. It was followed by Winton Capital Management with a $9.6 million position. Other investors bullish on the company included D E Shaw, Lynrock Lake, and AQR Capital Management. In terms of the portfolio weights assigned to each position Clearline Capital allocated the biggest weight to MicroStrategy Incorporated (NASDAQ:MSTR), around 2.08% of its 13F portfolio. Invenomic Capital Management is also relatively very bullish on the stock, designating 1.99 percent of its 13F equity portfolio to MSTR.

Since MicroStrategy Incorporated (NASDAQ:MSTR) has witnessed declining sentiment from the aggregate hedge fund industry, we can see that there is a sect of money managers who were dropping their full holdings by the end of the first quarter. Intriguingly, David Brown’s Hawk Ridge Management dropped the biggest investment of all the hedgies tracked by Insider Monkey, totaling about $6.6 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund dumped about $3.2 million worth. These moves are interesting, as aggregate hedge fund interest fell by 7 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as MicroStrategy Incorporated (NASDAQ:MSTR) but similarly valued. These stocks are Innoviva, Inc. (NASDAQ:INVA), Atrion Corporation (NASDAQ:ATRI), Tri Pointe Group Inc (NYSE:TPH), and Masonite International Corp (NYSE:DOOR). This group of stocks’ market values resemble MSTR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INVA 19 252057 0
ATRI 12 68214 -3
TPH 27 142074 -5
DOOR 26 271479 5
Average 21 183456 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $183 million. That figure was $64 million in MSTR’s case. Tri Pointe Group Inc (NYSE:TPH) is the most popular stock in this table. On the other hand Atrion Corporation (NASDAQ:ATRI) is the least popular one with only 12 bullish hedge fund positions. MicroStrategy Incorporated (NASDAQ:MSTR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately MSTR wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); MSTR investors were disappointed as the stock returned -0.4% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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