Were Hedge Funds Right Betting on These Five Stocks in Q1?

Investing in large-cap stocks offer investors a lower exposure to risk from, but they are still prone to volatility, often mimicking the trajectory of the broader market. Moreover, since many smart money investors often have a significant exposure to some large and mega-cap stocks, their drop on the back of unpredictable developments can cause significant pain, which has been recently proven by Valeant Pharmaceuticals. At Insider Monkey, we follow close to 800 hedge funds and other institutional investors, whose 13F portfolios we analyze every quarter and see in which stocks they prefer to invest their capital. Given that the first quarter has just ended, let’s take a look at the performance of the top five stocks, that ranked as the most popular among the funds we track and see if the investors made the right choice betting on them.

The main reason why we track the activity of these funds is our small-cap strategy, which showed that one of the more efficient ways to generate alpha by imitating hedge funds is by following them into the small-cap stocks they are collectively bullish on (see more details here).

Let’s start with Allergan plc Ordinary Shares (NYSE:AGN), which during the last quarter of 2015 saw the number of funds long the stock go up to 159 from 151, which helped it maintain the top spot as the most popular stock among the funds in our database, and the funds from our database amassed more than 18% of the company’s stock heading into 2016. The growth in popularity came amid the announcement of Pfizer’s plans to acquire Allergan in a $160 billion deal. Allergan plc Ordinary Shares (NYSE:AGN)’s stock lost 14% during the fourth quarter, as investors started to become more skeptical regarding the deal, which would represent the largest inversion (Pfizer plans to relocate its headquarters to Dublin after the acquisition to lower its corporate taxes) and might encounter problems while seeking approval from regulators. Nevertheless, both companies have assured that the deal should be completed in the second half of 2016. Among the top shareholders of Allergan plc Ordinary Shares (NYSE:AGN) are Andreas Halvorsen’s Viking Global, Dan Loeb’s Third Point and Paul Singer’s Elliott Management.

Alphabet Inc (NASDAQ:GOOGL)‘s both class A and class C stocks ranked among the most popular in our database with 154 funds holding 2.80% of the outstanding class A stock as of the end of December and 142 funds owning 2.70% of the outstanding class C shares. Both classes of stock registered a boost in popularity with the number of funds long Alphabet’s class A and class C stock surging by 25 and 23, respectively. Viking Global Management, managed by billionaire Andreas Halvorsen, holds 1.85 million shares and 1.15 million shares, respectively. Alphabet Inc (NASDAQ:GOOGL)’s both classes of stock move pretty close to each other and both ended the first quarter with minor declines close to 2%. Six months ago the company restructured itself under the name Alphabet Inc (NASDAQ:GOOGL) in order to allow each division to have a better grip on its own projects under different CEOs. However, six months in, things are looking not as bright as expected with experts now stating that Google’s parent company might have leadership problems at several divisions. In March, Bloomberg reported that Alphabet Inc (NASDAQ:GOOGL)’s robotic unit is put up for sale, three years after it was acquired, since the parent company doesn’t foresee a possibility for the unit to generate revenue in the next several years and it couldn’t find a CEO to replace Andy Rubin, who left the company in 2014. Following the restructuring, Alphabet’s investors have a better understanding of how different divisions work and can put the company under scrutiny despite the successes registered by Google alone.

Opposite to the previous stocks in this list, shares of Facebook Inc (NASDAQ:FB) gained 9% in the first three months of 2015. In the last round of 13F filings, 146 funds among those we track, reported long positions in the company as of the end of 2015 having amassed 3.60% of the outstanding stock, versus 128 investors a quarter earlier. Facebook Inc (NASDAQ:FB)’s stock seems a bit overvalued trading at almost 90 times current earnings, but the company has opportunities to deliver more growth for years to come. Its core business looks pretty solid with the number of monthly active users surging by an annual 14% in the last reported quarter to 1.59 billion. The company is also posting exceptional results on the mobile front, with mobile MAUs growing by 21% on the year to 1.44 billion. Facebook Inc (NASDAQ:FB) also can further monetize its Instagram and Whatsapp platform and even its own Messenger app can represent a new revenue stream for the company at some point. In addition, the recent release of Oculus Rift means that Facebook’s $2.0 billion acquisition of Oculus will soon start to bear fruit.

The number of investors bullish on Amazon.com, Inc. (NASDAQ:AMZN) went up by 28 to 141 during the last quarter of 2015 and the funds that held shares of the eCommerce retailer saw the stock lose by 12% during the first three months, which slightly offset the returns registered in 2015, when Amazon ranked as one of the best-performing stocks. Nevertheless, the funds from our database hold some 5.50% of the company’s outstanding stock, according to the previous round of 13F filings.  The first quarter was marked by Amazon.com, Inc. (NASDAQ:AMZN) making headlines in connection with rumors that the retailer plans to launch its own logistics system, which could compete with giants like FedEx or UPS. According to reports Amazon was planning to lease jets and acquire trucks in attempts to lower the shipping costs and increase the delivery speeds. However, investors are currently waiting for the company to start lowering the amount it invests in the expansion of its business and start focusing more on profits. In our list, the largest shareholder of Amazon.com, Inc. (NASDAQ:AMZN) is billionaire Chase Coleman‘s Tiger Global Management, with ownership of 3.19 million shares.

Finally, there is Microsoft Corporation (NASDAQ:MSFT), whose stock ended the first quarter almost flat, and which saw 140 funds from our database holding shares at the end of 2015 representing 5.30% of the tech-giant’s stock, compared to 113 investors a quarter earlier. Billionaire Barry Rosenstein’s JANA Partners initiated a stake in Microsoft Corporation (NASDAQ:MSFT) during the third quarter and further raised it by 28% to 9.92 million shares during the last three months of 2015. In its third-quarter letter to investors, JANA Partners said there are many possibilities for Microsoft Corporation (NASDAQ:MSFT) to grow its earnings and free cash flow per share for the next couple of years, including a reduction in opex, which is higher than many of its peers’ and it can return more capital to shareholders through dividends and stock buybacks. “Last, and this is a softer point and therefore harder to quantify, we are impressed by Satya Nadella and the management and product decisions he is making to improve the culture and the image of Microsoft,” JANA added (see article).

Disclosure: none