Were Hedge Funds Right About Piling Into Facebook Inc (FB)?

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 Facebook Inc (NASDAQ:FB) and determine whether the smart money was really smart about this stock.

Is Facebook Inc (NASDAQ:FB) an attractive investment right now? The best stock pickers were getting more bullish at the end of the first quarter. The number of bullish hedge fund positions went up by 15. Our calculations also showed that FB ranked 3rd 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). FB was in 213 hedge funds’ portfolios at the end of the first quarter of 2020. There were 198 hedge funds in our database with FB positions at the end of the previous quarter.

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.

Chase Coleman of Tiger Global

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 let’s take a gander at the fresh hedge fund action surrounding Facebook Inc (NASDAQ:FB).

Hedge fund activity in Facebook Inc (NASDAQ:FB)

At the end of the first quarter, a total of 213 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 8% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in FB over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Chase Coleman’s Tiger Global Management LLC has the number one position in Facebook Inc (NASDAQ:FB), worth close to $1.4596 billion, comprising 8.8% of its total 13F portfolio. On Tiger Global Management LLC’s heels is Citadel Investment Group, led by Ken Griffin, holding a $1.2105 billion call position; the fund has 0.5% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions comprise Boykin Curry’s Eagle Capital Management, Cliff Asness’s AQR Capital Management and Daniel Sundheim’s D1 Capital Partners. In terms of the portfolio weights assigned to each position Harvard Management Co allocated the biggest weight to Facebook Inc (NASDAQ:FB), around 33.71% of its 13F portfolio. Immersion Capital is also relatively very bullish on the stock, setting aside 29.16 percent of its 13F equity portfolio to FB.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Baupost Group, managed by Seth Klarman, initiated the most valuable position in Facebook Inc (NASDAQ:FB). Baupost Group had $330.9 million invested in the company at the end of the quarter. Eric W. Mandelblatt and Gaurav Kapadia’s Soroban Capital Partners also made a $232.6 million investment in the stock during the quarter. The following funds were also among the new FB investors: Farhad Nanji and Michael DeMichele’s MFN Partners, Eashwar Krishnan’s Tybourne Capital Management, and Scott Bessent’s Key Square Capital Management.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Facebook Inc (NASDAQ:FB) but similarly valued. These stocks are Berkshire Hathaway Inc. (NYSE:BRK-B), Visa Inc (NYSE:V), Johnson & Johnson (NYSE:JNJ), and Walmart Inc. (NYSE:WMT). This group of stocks’ market values are similar to FB’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BRK-B 115 18119296 2
V 157 14390735 14
JNJ 82 5454317 -3
WMT 55 4887227 3
Average 102.25 10712894 4

View table here if you experience formatting issues.

As you can see these stocks had an average of 102.25 hedge funds with bullish positions and the average amount invested in these stocks was $10713 million. That figure was $19600 million in FB’s case. Visa Inc (NYSE:V) is the most popular stock in this table. On the other hand Walmart Inc. (NYSE:WMT) is the least popular one with only 55 bullish hedge fund positions. Compared to these stocks Facebook Inc (NASDAQ:FB) 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 FB as the stock returned 41.3% 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.