Were Hedge Funds Right About Paypal Holdings Inc (PYPL)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Paypal Holdings Inc (NASDAQ:PYPL) and determine whether the smart money was really smart about this stock.

Is Paypal Holdings Inc (NASDAQ:PYPL) a bargain? The smart money slightly reduced its exposure towards the stock. The number of long hedge fund positions were trimmed by 8 in recent months. Prior to this move, the overall hedge fund sentiment towards PYPL was at its all time high. Our calculations also showed that PYPL currently ranks 11th 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.

Glen Kacher of Light Street Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to review the key hedge fund action surrounding Paypal Holdings Inc (NASDAQ:PYPL).

What have hedge funds been doing with Paypal Holdings Inc (NASDAQ:PYPL)?

At Q1’s end, a total of 118 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. The graph below displays the number of hedge funds with bullish position in PYPL over the last 18 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

The largest stake in Paypal Holdings Inc (NASDAQ:PYPL) was held by Fisher Asset Management, which reported holding $670.5 million worth of stock at the end of September. It was followed by Lone Pine Capital with a $504.1 million position. Other investors bullish on the company included Coatue Management, Tiger Global Management LLC, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Ogborne Capital allocated the biggest weight to Paypal Holdings Inc (NASDAQ:PYPL), around 24.91% of its 13F portfolio. Portland Hill Asset Management is also relatively very bullish on the stock, designating 14.09 percent of its 13F equity portfolio to PYPL.

Due to the fact that Paypal Holdings Inc (NASDAQ:PYPL) has faced bearish sentiment from the smart money, it’s safe to say that there lies a certain “tier” of hedge funds that slashed their full holdings in the first quarter. It’s worth mentioning that Ricky Sandler’s Eminence Capital sold off the biggest position of the “upper crust” of funds monitored by Insider Monkey, comprising an estimated $139.3 million in stock. Aaron Cowen’s fund, Suvretta Capital Management, also sold off its stock, about $120.8 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 8 funds in the first quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Paypal Holdings Inc (NASDAQ:PYPL) but similarly valued. We will take a look at ASML Holding N.V. (NASDAQ:ASML), Sanofi (NASDAQ:SNY), Accenture Plc (NYSE:ACN), and Charter Communications, Inc. (NASDAQ:CHTR). All of these stocks’ market caps are similar to PYPL’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ASML 30 1505012 8
SNY 15 970814 -16
ACN 49 1003250 8
CHTR 104 9914920 39
Average 49.5 3348499 9.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 49.5 hedge funds with bullish positions and the average amount invested in these stocks was $3348 million. That figure was $4659 million in PYPL’s case. Charter Communications, Inc. (NASDAQ:CHTR) is the most popular stock in this table. On the other hand Sanofi (NASDAQ:SNY) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Paypal Holdings Inc (NASDAQ:PYPL) is more popular among hedge funds. 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 13.3% in 2020 through June 25th but still managed to beat the market by 16.8 percentage points. Hedge funds were also right about betting on PYPL as the stock returned 80.2% so far in Q2 (through June 25th) 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.