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Were Hedge Funds Right About Piling Into Shopify Inc (SHOP)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Shopify Inc (NYSE:SHOP) and determine whether hedge funds had an edge regarding this stock.

Shopify Inc (NYSE:SHOP) was in 43 hedge funds’ portfolios at the end of March. SHOP shareholders have witnessed an increase in hedge fund sentiment of late. There were 30 hedge funds in our database with SHOP holdings at the end of the previous quarter. Our calculations also showed that SHOP 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Anna Nikolayevsky Axel Capital

Anna Nikolayevsky of Axel Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. 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 analyze the latest hedge fund action encompassing Shopify Inc (NYSE:SHOP).

What have hedge funds been doing with Shopify Inc (NYSE:SHOP)?

At Q1’s end, a total of 43 of the hedge funds tracked by Insider Monkey were long this stock, a change of 43% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SHOP over the last 18 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).

More specifically, Lone Pine Capital was the largest shareholder of Shopify Inc (NYSE:SHOP), with a stake worth $696.3 million reported as of the end of September. Trailing Lone Pine Capital was SCGE Management, which amassed a stake valued at $351.9 million. Whale Rock Capital Management, D E Shaw, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Strategy Capital allocated the biggest weight to Shopify Inc (NYSE:SHOP), around 24.06% of its 13F portfolio. Abdiel Capital Advisors is also relatively very bullish on the stock, designating 11.93 percent of its 13F equity portfolio to SHOP.

As one would reasonably expect, specific money managers have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the most valuable position in Shopify Inc (NYSE:SHOP). Arrowstreet Capital had $152.8 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also initiated a $46 million position during the quarter. The other funds with new positions in the stock are Renaissance Technologies, Benjamin A. Smith’s Laurion Capital Management, and Anna Nikolayevsky’s Axel Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Shopify Inc (NYSE:SHOP). These stocks are Kimberly Clark Corporation (NYSE:KMB), Marsh & McLennan Companies, Inc. (NYSE:MMC), Deere & Company (NYSE:DE), and Global Payments Inc (NYSE:GPN). This group of stocks’ market valuations resemble SHOP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KMB 46 1173309 9
MMC 37 668435 6
DE 44 875005 -6
GPN 67 2154936 3
Average 48.5 1217921 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.5 hedge funds with bullish positions and the average amount invested in these stocks was $1218 million. That figure was $2892 million in SHOP’s case. Global Payments Inc (NYSE:GPN) is the most popular stock in this table. On the other hand Marsh & McLennan Companies, Inc. (NYSE:MMC) is the least popular one with only 37 bullish hedge fund positions. Shopify Inc (NYSE:SHOP) is not the least popular stock in this group but hedge fund interest is still below 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on SHOP as the stock returned 127.7% during the second quarter and outperformed the market by an even larger margin.

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