What Hedge Funds Think of Goldman Sachs’ Top Internet Stocks

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The Goldman Sachs Group recently came out with a list of Internet stocks that it thinks investors should buy at current levels. To compile the list, analysts at Goldman Sachs took the 34 Internet companies they currently cover and ranked them on the basis of their leverage, competitive advantage, growth and innovation. On the basis of these factors, the five stocks that topped their list were Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOGL), Twitter Inc (NYSE:TWTR), LinkedIn Corp (NYSE:LNKD), and Amazon.com, Inc. (NASDAQ:AMZN), in that order. While there is no doubt that analysts’ ratings and rankings help investors to select the right stocks for their portfolios, we at Insider Monkey believe that there is another metric which proves to be more reliable in the long run in projecting the future trajectory of a stock. That metric is smart money’s conviction on a stock. To gauge that, we routinely scan the 13F filings of over 730 hedge funds and prominent investors and identify which stocks are most popular among them. Read further to see how Goldman Sachs’ top internet picks compare to their popularity among the hedge funds that we track.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas (see the details here).

#5 Twitter Inc (NYSE:TWTR)

 – Investors with Long Positions (as of December 31): 30

 – Aggregate Value of Investors’ Holdings (as of December 31): $320.87 million

Though analysts at Goldman like Twitter Inc (NYSE:TWTR) because of its incremental margins and its estimated sales growth over the next few years, it was by no means a popular tech stock at the end of fourth quarter among the investors in our system. The number of those investors with ownership in the company increased by three and the aggregate value of their holdings increased by 29.2% during the fourth quarter. However, Twitter still lagged many other stocks, especially considering the general popularity of the company, as it ranked as just the 498th most popular stock with 30 investors in our database. Shares of Twitter declined heavily earlier this year, but recouped some of those losses after the company reported its fourth quarter numbers and now trade down by 22.2% year-to-date. While analysts had projected the company to report EPS of $0.12 on revenue of $709.94 million for the quarter, it declared EPS of $0.16 on revenue of $710.47 million. Due to the poor stock performance of both Twitter Inc and Square Inc (NYSE:SQ) over the past few months, several investors and analysts have raised concerns about the leadership skills of Jack Dorsey, who serves as CEO of both companies. Iconic trader Steve Cohen‘s Point72 Asset Management initiated a stake in Twitter during the fourth quarter, purchasing 911,093 shares.

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#4 LinkedIn Corp (NYSE:LNKD)

 – Investors with Long Positions (as of December 31): 48

 – Aggregate Value of Investors’ Holdings (as of December 31): $2.41 billion

Amid an 18.4% rise in LinkedIn Corp (NYSE:LNKD)’s stock during the fourth quarter, the ownership of the company among investors we cover increased by ten and the aggregate value of their holdings saw a surge of $633 million. However, the conviction of these investors likely suffered a major blow recently, when the company’s stock slumped hard after it reported its fourth quarter numbers. Since the fourth quarter numbers were better-than-expected, most analysts were initially at a loss and blamed the slide on investors overreacting to the weak forward guidance provided by the company. However, they soon realized that it was not overreaction, but fears that LinkedIn had been providing a flawed user engagement metric during the past few quarters which had been buffing their numbers. Interestingly, on the same day that analysts at Goldman Sachs ranked LinkedIn Corp among their favorite picks in the Internet space, they also downgraded it to a ‘Buy’ from ‘Conviction Buy’ and reduced their price target on it to $155 from $200.

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