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Were Hedge Funds Right About Piling Into CrowdStrike Holdings, Inc. (CRWD)?

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 CrowdStrike Holdings, Inc. (NASDAQ:CRWD) and determine whether the smart money was really smart about this stock.

Is CrowdStrike Holdings, Inc. (NASDAQ:CRWD) ready to rally soon? Hedge funds were getting more optimistic. The number of bullish hedge fund bets rose by 17 in recent months. Our calculations also showed that CRWD 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). CRWD was in 65 hedge funds’ portfolios at the end of March. There were 48 hedge funds in our database with CRWD positions at the end of the previous quarter.

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.

Ryan Frick Dorsal Capital

Ryan Frick of Dorsal 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. With all of this in mind we’re going to take a look at the recent hedge fund action surrounding CrowdStrike Holdings, Inc. (NASDAQ:CRWD).

What have hedge funds been doing with CrowdStrike Holdings, Inc. (NASDAQ:CRWD)?

At the end of the first quarter, a total of 65 of the hedge funds tracked by Insider Monkey were long this stock, a change of 35% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in CRWD over the last 18 quarters. With hedge funds’ capital changing hands, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in CrowdStrike Holdings, Inc. (NASDAQ:CRWD) was held by Whale Rock Capital Management, which reported holding $178.8 million worth of stock at the end of September. It was followed by Coatue Management with a $177 million position. Other investors bullish on the company included Matrix Capital Management, Citadel Investment Group, and Polar Capital. In terms of the portfolio weights assigned to each position Stony Point Capital allocated the biggest weight to CrowdStrike Holdings, Inc. (NASDAQ:CRWD), around 4.31% of its 13F portfolio. Dorsal Capital Management is also relatively very bullish on the stock, earmarking 4.28 percent of its 13F equity portfolio to CRWD.

As industrywide interest jumped, key money managers have been driving this bullishness. Coatue Management, managed by Philippe Laffont, initiated the largest position in CrowdStrike Holdings, Inc. (NASDAQ:CRWD). Coatue Management had $177 million invested in the company at the end of the quarter. David Goel and Paul Ferri’s Matrix Capital Management also initiated a $135.6 million position during the quarter. The other funds with brand new CRWD positions are Brian Ashford-Russell and Tim Woolley’s Polar Capital, Brandon Haley’s Holocene Advisors, and Ryan Frick and Oliver Evans’s Dorsal Capital Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as CrowdStrike Holdings, Inc. (NASDAQ:CRWD) but similarly valued. These stocks are Rollins, Inc. (NYSE:ROL), Alliant Energy Corporation (NASDAQ:LNT), Martin Marietta Materials, Inc. (NYSE:MLM), and Mid America Apartment Communities Inc (NYSE:MAA). This group of stocks’ market valuations are closest to CRWD’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ROL 25 447589 -9
LNT 30 602098 2
MLM 44 1436776 -8
MAA 26 244541 2
Average 31.25 682751 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $683 million. That figure was $1302 million in CRWD’s case. Martin Marietta Materials, Inc. (NYSE:MLM) is the most popular stock in this table. On the other hand Rollins, Inc. (NYSE:ROL) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks CrowdStrike Holdings, Inc. (NASDAQ:CRWD) 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 CRWD as the stock returned 89.9% 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.