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Were Hedge Funds Right About Piling Into Alphabet Inc (GOOGL)?

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 Alphabet Inc (NASDAQ:GOOGL) based on the first quarter’s 13F filings and determine whether they were right about the stock.

Alphabet Inc (NASDAQ:GOOGL) shareholders have witnessed an increase in hedge fund interest of late. Hedge fund sentiment towards GOOGL is currently at its all time high. Our calculations also showed that GOOGL ranks 5th 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.

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 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. 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.

William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

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 take a gander at the new hedge fund action surrounding Alphabet Inc (NASDAQ:GOOGL).

What have hedge funds been doing with Alphabet Inc (NASDAQ:GOOGL)?

At the end of the first quarter, a total of 167 of the hedge funds tracked by Insider Monkey were long this stock, a change of 2% from the fourth quarter of 2019. By comparison, 147 hedge funds held shares or bullish call options in GOOGL a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Alphabet Inc (NASDAQ:GOOGL) was held by Fisher Asset Management, which reported holding $1736.5 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $1585.4 million position. Other investors bullish on the company included AQR Capital Management, Diamond Hill Capital, and Cantillon Capital Management. In terms of the portfolio weights assigned to each position Blacksheep Fund Management allocated the biggest weight to Alphabet Inc (NASDAQ:GOOGL), around 28.07% of its 13F portfolio. AltaRock Partners is also relatively very bullish on the stock, earmarking 21.47 percent of its 13F equity portfolio to GOOGL.

As industrywide interest jumped, some big names were breaking ground themselves. Tybourne Capital Management, managed by Eashwar Krishnan, initiated the most valuable position in Alphabet Inc (NASDAQ:GOOGL). Tybourne Capital Management had $86.2 million invested in the company at the end of the quarter. Chen Tianqiao’s Shanda Asset Management also made a $58.1 million investment in the stock during the quarter. The other funds with brand new GOOGL positions are Michael Larson’s Bill & Melinda Gates Foundation Trust, Brandon Haley’s Holocene Advisors, and Leon Shaulov’s Maplelane Capital.

Let’s go over hedge fund activity in other stocks similar to Alphabet Inc (NASDAQ:GOOGL). These stocks are Alphabet Inc (NASDAQ:GOOG), Alibaba Group Holding Limited (NYSE:BABA), Facebook Inc (NASDAQ:FB), and Berkshire Hathaway Inc. (NYSE:BRK-B). This group of stocks’ market values are similar to GOOGL’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GOOG 147 15254756 -1
BABA 167 19433098 -3
FB 213 19600111 15
BRK-B 115 18119296 2
Average 160.5 18101815 3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 160.5 hedge funds with bullish positions and the average amount invested in these stocks was $18102 million. That figure was $11083 million in GOOGL’s case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand Berkshire Hathaway Inc. (NYSE:BRK-B) is the least popular one with only 115 bullish hedge fund positions. Alphabet Inc (NASDAQ:GOOGL) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on GOOGL, though not to the same extent, as the stock returned 24% during the first two months and twenty five days of the second quarter and outperformed the market as well.

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