Were Hedge Funds Right About Sticking With Facebook Inc (FB)?

Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost more than 25%. Facebook, which was the second most popular stock, lost 20% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the first 2.5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Facebook Inc (NASDAQ:FB) was in 161 hedge funds’ portfolios at the end of the fourth quarter of 2018. FB investors should be aware of a decrease in hedge fund sentiment lately. There were 164 hedge funds in our database with FB holdings at the end of September. This, however, didn’t change the fact that FB is still one of the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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 our short portfolio.

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Let’s take a peek at the key hedge fund action surrounding Facebook Inc (NASDAQ:FB).

Hedge fund activity in Facebook Inc (NASDAQ:FB)

Heading into the first quarter of 2019, a total of 161 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from the previous quarter. On the other hand, there were a total of 180 hedge funds with a bullish position in FB at the beginning of this year. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

FB Hedge Fund Sentiment February 2019

Among these funds, Citadel Investment Group held the most valuable stake in Facebook Inc (NASDAQ:FB), which was worth $1141.9 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $896.7 million worth of shares. Moreover, Lone Pine Capital, Renaissance Technologies, and D E Shaw were also bullish on Facebook Inc (NASDAQ:FB), allocating a large percentage of their portfolios to this stock.

Seeing as Facebook Inc (NASDAQ:FB) has faced bearish sentiment from the smart money, we can see that there exists a select few funds that slashed their entire stakes last quarter. It’s worth mentioning that John H. Scully’s SPO Advisory Corp cut the biggest investment of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $484.3 million in stock, and Daniel S. Och’s OZ Management was right behind this move, as the fund cut about $212.3 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 3 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Facebook Inc (NASDAQ:FB) but similarly valued. We will take a look at Alibaba Group Holding Limited (NYSE:BABA), Johnson & Johnson (NYSE:JNJ), JPMorgan Chase & Co. (NYSE:JPM), and Visa Inc (NYSE:V). This group of stocks’ market values resemble FB’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BABA 113 11471017 -14
JNJ 73 5212191 10
JPM 101 10016959 2
V 128 13066923 16
Average 103.75 9941773 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 103.75 hedge funds with bullish positions and the average amount invested in these stocks was $9942 million. That figure was $14869 million in FB’s case. Visa Inc (NYSE:V) is the most popular stock in this table. On the other hand Johnson & Johnson (NYSE:JNJ) is the least popular one with only 73 bullish hedge fund positions. Compared to these stocks Facebook Inc (NASDAQ:FB) is more popular among hedge funds. Actually, Facebook was the third most popular stock among hedge funds and the tech giant rewarded its backers with a 26.6% year-to-date gain. It seems like hedge funds were right about this stock. Our calculations also showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. So, hedge funds favorite stocks have been performing really well in the last 3 months.

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