Were Hedge Funds Right About Twitter Inc (TWTR)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 835 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about Twitter Inc (NYSE:TWTR) in this article.

Twitter Inc (NYSE:TWTR) shares haven’t seen a lot of action during the fourth quarter. Overall, hedge fund sentiment was unchanged. The stock was in 55 hedge funds’ portfolios at the end of the fourth quarter of 2019. At the end of this article we will also compare TWTR to other stocks including KKR & Co Inc. (NYSE:KKR), Xilinx, Inc. (NASDAQ:XLNX), and Verisk Analytics, Inc. (NASDAQ:VRSK) to get a better sense of its popularity.

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 41 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.

Gabriel Plotkin Melvin Capital Management

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s view the recent hedge fund action encompassing Twitter Inc (NYSE:TWTR).

What does smart money think about Twitter Inc (NYSE:TWTR)?

At Q4’s end, a total of 55 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. By comparison, 49 hedge funds held shares or bullish call options in TWTR a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is TWTR A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Philippe Laffont’s Coatue Management has the biggest position in Twitter Inc (NYSE:TWTR), worth close to $624.1 million, accounting for 5% of its total 13F portfolio. The second most bullish fund manager is Ken Griffin of Citadel Investment Group, with a $185.7 million call position; 0.1% of its 13F portfolio is allocated to the stock. Some other members of the smart money that are bullish consist of D. E. Shaw’s D E Shaw, Brett Barakett’s Tremblant Capital and Cliff Asness’s AQR Capital Management. In terms of the portfolio weights assigned to each position ThornTree Capital Partners allocated the biggest weight to Twitter Inc (NYSE:TWTR), around 11.2% of its 13F portfolio. Kayak Investment Partners is also relatively very bullish on the stock, setting aside 9.53 percent of its 13F equity portfolio to TWTR.

Because Twitter Inc (NYSE:TWTR) has witnessed bearish sentiment from the entirety of the hedge funds we track, logic holds that there was a specific group of hedge funds who were dropping their entire stakes in the third quarter. Interestingly, Renaissance Technologies sold off the largest position of all the hedgies watched by Insider Monkey, totaling about $240.6 million in stock. Panayotis Takis Sparaggis’s fund, Alkeon Capital Management, also sold off its stock, about $143.2 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Twitter Inc (NYSE:TWTR). These stocks are KKR & Co Inc. (NYSE:KKR), Xilinx, Inc. (NASDAQ:XLNX), Verisk Analytics, Inc. (NASDAQ:VRSK), and Aptiv PLC (NYSE:APTV). This group of stocks’ market values are closest to TWTR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KKR 56 3623655 13
XLNX 42 1025915 -1
VRSK 33 848898 -1
APTV 46 1053189 17
Average 44.25 1637914 7

View table here if you experience formatting issues.

As you can see these stocks had an average of 44.25 hedge funds with bullish positions and the average amount invested in these stocks was $1638 million. That figure was $1427 million in TWTR’s case. KKR & Co Inc. (NYSE:KKR) is the most popular stock in this table. On the other hand Verisk Analytics, Inc. (NASDAQ:VRSK) is the least popular one with only 33 bullish hedge fund positions. Twitter Inc (NYSE:TWTR) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 lost 1.0% in 2020 through April 20th but beat the market by 11 percentage points. Unfortunately TWTR wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on TWTR were disappointed as the stock returned -15.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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