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Were Hedge Funds Right About Zoom Video Communications, Inc. (ZM)?

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. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Zoom Video Communications, Inc. (NASDAQ:ZM).

Zoom Video Communications, Inc. (NASDAQ:ZM) investors should be aware of a decrease in enthusiasm from smart money of late. Our calculations also showed that ZM isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

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.

Colin Moran Abdiel Capital

Colin Moran of Abdiel Capital Advisors

We leave no stone unturned when looking for the next great investment idea. For example, COVID-19 pandemic is still the main driver of stock prices. So we are checking out this trader’s corona catalyst trades. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 take a peek at the recent hedge fund action surrounding Zoom Video Communications, Inc. (NASDAQ:ZM).

Hedge fund activity in Zoom Video Communications, Inc. (NASDAQ:ZM)

At the end of the fourth quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -15% from the third quarter of 2019. On the other hand, there were a total of 0 hedge funds with a bullish position in ZM a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Zoom Video Communications, Inc. (NASDAQ:ZM) was held by Hillhouse Capital Management, which reported holding $470.6 million worth of stock at the end of September. It was followed by Tiger Global Management LLC with a $83.5 million position. Other investors bullish on the company included Wildcat Capital Management, Abdiel Capital Advisors, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Wildcat Capital Management allocated the biggest weight to Zoom Video Communications, Inc. (NASDAQ:ZM), around 22.37% of its 13F portfolio. Thrive Capital is also relatively very bullish on the stock, designating 14.09 percent of its 13F equity portfolio to ZM.

Due to the fact that Zoom Video Communications, Inc. (NASDAQ:ZM) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of fund managers who sold off their entire stakes last quarter. Intriguingly, Alex Sacerdote’s Whale Rock Capital Management said goodbye to the biggest investment of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $101 million in stock, and Philippe Laffont’s Coatue Management was right behind this move, as the fund dumped about $86.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 5 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Zoom Video Communications, Inc. (NASDAQ:ZM) but similarly valued. These stocks are Incyte Corporation (NASDAQ:INCY), Sea Limited (NYSE:SE), Alexandria Real Estate Equities Inc (NYSE:ARE), and DISH Network Corp. (NASDAQ:DISH). All of these stocks’ market caps resemble ZM’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
INCY 46 3965633 11
SE 76 3911536 7
ARE 21 297129 -4
DISH 41 1617687 3
Average 46 2447996 4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 46 hedge funds with bullish positions and the average amount invested in these stocks was $2448 million. That figure was $858 million in ZM’s case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand Alexandria Real Estate Equities Inc (NYSE:ARE) is the least popular one with only 21 bullish hedge fund positions. Zoom Video Communications, Inc. (NASDAQ:ZM) 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 1.0% in 2020 through May 1st but still beat the market by 12.9 percentage points. A small number of hedge funds were also right about betting on ZM as the stock returned 103.6% during the same time period and outperformed the market by an even larger margin.
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.

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