In this article we discuss the 5 stocks that best performing hedge funds are piling into. If you want to read our detailed analysis of these stocks, go directly to the 13 Stocks that Best Performing Hedge Funds are Piling Into.
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5. Wells Fargo & Company (NYSE: WFC)
Number of Hedge Fund Holders: 96
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 10
Wells Fargo & Company (NYSE: WFC) is a California-based financial services company founded in 1852. It is ranked fifth on our list of 13 stocks that best performing hedge funds are piling into. The stock has offered investors returns exceeding 54% in the past twelve months. According to Insider Monkey calculations, ten hedge funds out of the 100 best performing ones are bullish on Wells Fargo. It is one of the largest banks in the world with close to $2 trillion in assets and equity under management.
On May 19, investment advisory UBS downgraded Wells Fargo & Company (NYSE: WFC) stock to Neutral with a revised target of $47 from $40. The share price of the investment bank dipped over 1.3% in premarket trading after the ratings update.
At the end of the first quarter of 2021, 96 hedge funds in the database of Insider Monkey held stakes worth $7.4 billion in Wells Fargo & Company (NYSE: WFC), down from 99 in the preceding quarter worth $8.7 billion.
RGA Investment Advisors, in its Q4 2020 investor letter, mentioned Wells Fargo & Company (NYSE: WFC). Here is what the fund has to say in its letter:
“Detractors to performance relative to the index include financial services holdings such as Wells Fargo. While banks in general have suffered due to the recession and experienced credit losses, Wells Fargo also suffered from operational missteps. It is our expectation, however, that our bank holdings in general will benefit from stronger economic growth as the pandemic recedes; and we believe Wells Fargo in particular, will, over time, lower their costs and successfully grow their businesses.”
4. Twitter, Inc. (NYSE: TWTR)
Number of Hedge Fund Holders: 107
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 11
Twitter, Inc. (NYSE: TWTR) is a California-based social networking platform founded in 2006. It is placed fourth on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 69% to investors over the course of the past twelve months. According to Insider Monkey calculations, eleven hedge funds out of the 100 best performing ones are bullish on Twitter.
On April 29, Twitter, Inc. (NYSE: TWTR) posted quarterly earnings results, reporting earnings per share of $0.16 for the first three months of 2021, beating market expectations by $0.02. The revenue over the period was more than $1 billion, up 28% year-on-year.
At the end of the first quarter of 2021, 107 hedge funds in the database of Insider Monkey held stakes worth $4.5 billion in Twitter, Inc. (NYSE: TWTR), up from 78 in the preceding quarter worth $2.7 billion.
RGA Investment Advisors, in its Q1 2021 investor letter, mentioned Twitter, Inc. (NYSE: TWTR). Here is what the fund has to say in its letter:
“‘The bird has wings’—Twitter’s quarter started off somewhat ominously, with Twitter the worst performing stock in the S&P 500 following the January 6th insurrection and questions about the stickiness of the userbase after permanently suspending the account of President Trump.8 By the end of the quarter, Twitter was one of the best performers in the index after exceptionally strong fourth quarter earnings and guidance for the year and an upbeat analyst day that highlighted a rapidly evolving product roadmap placing the timeline at the center of ephemeral (fleets), long form (Revue) and voice (Spaces). The improvements to the experience makes the platform more accessible and provides more opportunity to continue growing the userbase. Importantly, Twitter also embraced what we have been calling “creative empowerment” in previewing SuperFollows and a host of features designed to help content creators and contributors monetize their own audience on Twitter itself. These developments, alongside considerable progress on the advertising platform give us growing conviction that Twitter will deliver on its largely untapped opportunity—in other words, the value creation opportunity on top of the low multiple we were able to build our position at. Elliot spoke at length about these developments on Yet Another Value Podcast with Andrew Walker and The Business Brew with Bill Brewster, which we invite you to check out.”
3. General Motors Company (NYSE: GM)
Number of hedge fund holders: 86
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 11
General Motors Company (NYSE: GM) is a Michigan-based carmaker founded in 1908. It is ranked third on our list of 13 stocks that best performing hedge funds are piling into. The stock has offered investors returns exceeding 104% over the course of the past twelve months. According to Insider Monkey calculations, eleven hedge funds out of the 100 best performing ones are bullish on General Motors. Some of the products the firm markets include cars, trucks, crossovers, and automobile parts.
On May 5, General Motors Company (NYSE: GM) announced quarterly earnings results, posting earnings per share of $2.25 for the first three months of 2021, beating market predictions by $1.20. The revenue for the first quarter of 2021 was $32.4 billion, down 0.7% year-on-year.
Out of the hedge funds being tracked by Insider Monkey, Nebraska-based investment firm Berkshire Hathaway is a leading shareholder in the firm with 67 million shares worth more than $3.8 billion.
Junto Investments, in its Q4 2020 investor letter, mentioned General Motors Company (NYSE: GM). Here is what the fund has to say in its letter:
“General Motors was the biggest gainer. We managed to buy it at a screamingly cheap price in the middle of March. A lot of interesting news has emerged about GM recently, including the new electric product delivery system BrightDrop and GM Cruise’s team-up with Microsoft Azure to commercialize self-driving cars in 2021. GM’s intrinsic value is crystallizing and the company is worth a whole lot more than is still reflected in the market.”
2. Carvana Co. (NYSE: CVNA)
Number of hedge fund holders: 64
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 12
Carvana Co. (NYSE: CVNA) is an Arizona-based online used car retailer founded in 2012. It is placed second on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 173% to investors over the past year. According to Insider Monkey calculations, twelve hedge funds out of the 100 best performing ones are bullish on Carvana. The firm offers users the ability to research, analyze through imaging technology, purchase, and schedule cars for delivery through their platform.
Carvana Co. (NYSE: CVNA) posted earnings results for the first quarter of 2021 on May 5, reporting earnings per share of -$0.46, beating market estimates by $0.21. The revenue over the period was $2.25 billion, up 104% year-on-year.
At the end of the first quarter of 2021, 64 hedge funds in the database of Insider Monkey held stakes worth $7.5 billion in Carvana Co. (NYSE: CVNA), up from 63 in the preceding quarter worth $7 billion.
In its Q1 2021 investor letter, Steel City Capital LP, an asset management firm, highlighted a few stocks and Carvana Co. (NYSE: CVNA) was one of them. Here is what the fund said:
“Carvana’s (CVNA) 4Q’20 results weren’t particularly great. EBITDA was negative ($70) million, a stark turnaround on a sequential basis from a first-ever EBITDA profit of $21 million in 3Q’20. The culprit was a steep drop off in retail unit GPU ($1,265 vs. $1,857) and wholesale unit GPU ($358 vs. $1,113) as some of the COVID-driven aberrations in the used car market began to abate.
The company’s presentation of EBITDA (calculated “bottom up”) is dubious, as it commingles non-operating items including mark-to-market changes in its retained securitization portfolio. With the exception of 1Q’20, when ABS markets were going haywire, this line item provided a tailwind throughout 2020, including a gain of $5 million in 4Q’20. Also on the non-operating self-help front, management released a reserve for vehicle service contract cancellations in 4Q’20, adding another $7 million to EBITDA, and boosting “Other” GPU by $96.
Putting it all together, I put operating EBITDA closer to negative ($82) million vs. the $70 million printed by the company. This is a larger loss than 4Q’19 (calculated on a similar operating basis) despite the company selling 43% more retail units y/y!
Management didn’t provide formal guidance for 2021, but did offer guardrails for how to think about the year. Retail unit growth is expected to accelerate from last year’s 37%, with total revenue tracking in-line with retail unit growth. Total revenue per retail unit was $22,885 last year, meaning the company thinks it can hold this metric relatively flat throughout the year. Management also noted it expects some softening in retail ASPs throughout the year (“I think the gains that we saw in ASP in the back half of the year, we expect to moderate a little bit in 20216 “), with the implication being “Other” revenue – including financing – will serve as an offset.
Why look at total revenue per retail unit? The company guides to total GPU, which itself is an apples-and-oranges mix of total gross profit divided by only retail units. As for total GPU, management called out expectations for “mid- $3,000s” in FY21. Putting the pieces together, $3,500 of total GPU divided by $22,885 of total revenue per retail unit implies gross margin of 15.3% for the year, roughly 100 bps of pickup vs. last year’s 14.2%.
On the EBITDA front, management guided to continuing cost leverage but still a “small EBITDA margin loss” in FY’21. Splitting the difference between last year’s negative 4.6% EBITDA margin and breakeven gives us something in the realm of a 2.5% EBITDA margin loss for FY’21. So, 200 bps of total improvement, 100 bps of which we know is coming from GPU margin. The other 100 bps, therefore, must come from SG&A.
Applying a negative 2.5% margin to $22,885 of total revenue per retail unit implies about $575 of negative EBITDA per unit sold. This also allows us to back into implied cash SG&A per unit of $4,075, which is 17.8%, and 100 bps better than last year’s 18.8%.
The unknown variable is what retail unit growth actually looks like in 2021. All we know is it’s going to “accelerate” vs. last year’s 37%. Doing some back of the envelope sensitivity implies negative EBITDA ranging from a ($210) million loss at 50% unit growth to a ($250) million loss at 80% growth (A classic case of “We lose money on every sale but make up for it in volume!”). For context, the street is currently forecasting a negative EBITDA margin of 1.0% and negative EBITDA of ($87.5) million.
I think one of the big risks to the company’s outlook isn’t necessarily on the volume front – I believe management when they say they can’t keep pace with demand – but instead on the GPU front. Before 2H’20, only once in the prior 14 quarters did total GPU exceed $3,000. 3Q’20 reached an all-time high due to strong vehicle pricing and strong finance gross profit, while 4Q’20 got its boost from finance gross profit and the abovementioned reserve release. Finance GPU is a function of both absolute interest rates and ABS spreads, and the trajectory of absolute rates since the beginning of 2021 calls into question the company’s ability to maintain finance GPU at $1,400, let alone grow it.”
1. Sea Limited (NYSE: SE)
Number of Hedge Fund Holders: 98
Number of Hedge Funds Having Stakes in the Company Out of Top 100 Hedge Funds: 14
Sea Limited (NYSE: SE) is a Singapore-based holding company that owns and runs popular ecommerce platform Shopee. It was founded in 2009 It is ranked first on our list of 13 stocks that best performing hedge funds are piling into. The stock has returned more than 202% to investors over the past year. Sea has stakes in the digital entertainment and financial services businesses as well. According to Insider Monkey calculations, fourteen hedge funds out of the 100 best performing ones are bullish on Sea.
Sea Limited (NYSE: SE) posted quarterly earnings in late April, reporting earnings per share of -$0.62, missing market estimates by $0.07. The revenue for the first quarter of 2021 was $1.8 billion, up 146% year-on-year.
At the end of the first quarter of 2021, 98 hedge funds in the database of Insider Monkey held stakes worth $10.4 billion in Sea Limited (NYSE: SE), down from 115 the preceding quarter worth $10.8 billion.
In its Q4 2020 investor letter, Hayden Capital, an asset management firm, highlighted a few stocks and Sea Limited (NYSE: SE) was one of them. Here is what the fund said:
“Sea Ltd (SE): When I wrote our Q4 2019 letter about Shopee launching a Brazilian business, it seemed very few investors or competitors knew or cared.
A year ago, I wrote: “This is the first test for the ecommerce marketplace outside of its Southeast Asia home base. Will the platform’s fun and addicting features overcome a lack of local knowledge and presence? It’s hard to predict consumer behavior and how accepting users will be to a platform – especially one that’s a foreign culture and 10,000 miles away. The only way to know is to experiment and watch the results closely.
Empirically though, it seems that what consumers find entertaining in Asia, generally translates well to Brazil (and Shopee really is as much an entertainment platform, as an ecommerce one).
For example, just look at the top 10 free apps in Brazil. Two are utility messaging apps, so we’ll ignore those (WhatsApp and
Facebook Messenger). But among the remaining eight apps, they’re all entertainment based and overwhelmingly Asian. Four are from China (Kwai, TikTok, VStatus, TikTok Lite), two from Singapore (Free Fire and Shopee, both Sea Ltd apps), and one from the US (Instagram). The commonality is that all these apps are experts at creating addictive habits, as evidenced by their personalized recommendations, avg usage time, number of logins per day per user, etc.” (LINK)
I distinctly remember having conversations with several Brazilian hedge funds as recently as last summer who were investors in Sea Ltd. When the topic of Brazil came up, many of them didn’t even know Shopee was operating in their own backyard!
Part of this stems from the fact that Shopee tends to enter markets with a bottoms-up approach. Instead of going after urban, high disposable income users first (of which these hedge fund professionals were certainly part of), they tend to initially go after those with only a few hundred or thousand USD of annual disposable income. These users tend to reside outside of major cities, have fewer choices for recreational pastime (thus turning to gaming, short-form videos, or online shopping for entertainment), can’t afford “branded” items and thus are willing to take a chance on cheaper (but still good quality) un-branded goods, and are willing to wait several weeks for it to be shipped from Asian factories.
Anyone who has studied Pinduoduo (Nasdaq: PDD) in China, will recognize this strategy and just how large of a market these consumers can be. As Shopee gains popularity in a market, they will then start to slowly move “up-market”, and cater to more urban and higher-income consumers. They’ve already followed this exact strategy in Southeast Asia, and this is the point they’ve reached in Brazil over the past year.
Shopee made its first big social push last fall, hiring over a dozen influencers with 1M+ followers to promote Shopee’s Black Friday sale (LINK). In addition, they also released their first Brazilian TV commercial last year.
It seems these initiatives are working. Shopee now consistently ranks in Brazil’s top 5 apps (while sister app Free Fire, is also the #1 grossing app). In addition, Shopee also moved Pine Kyaw (LINK), one of their key lieutenants in Vietnam who successfully helped Shopee fight off competitors (Tiki, Lazada, Sendo), to Brazil last May.
For the past year, the company has insisted publicly that the Brazil initiative is still a “test” initiated by the cross-border team. While this may have been true at first, it’s clear this is no longer a “test”, but rather a strategic focus for Shopee and posed to be the next battleground. It’s likely the company has chosen to remain tight-lipped so as to not tip off competitors, while they quietly “position the troops” to prepare for a larger assault.
For example, Shopee is also starting to allow local sellers to join the platform and list their local inventory (LINK). By definition, this is no longer a cross-border initiative (i.e. allowing their Southeast Asian sellers to sell to Brazilian consumers, and then shipping the goods directly from Asia. This is the model Aliexpress follows.).
This is the start of a localized marketplace. And similar to their early days in Southeast Asia, the goal is to reach the “tipping point” at which the marketplace becomes self-sustainable (this concept is discussed in our Q1 2019 letter; LINK). The weapons of choice in reaching critical mass: social media influencers to drive rust & awareness, free shipping & discounts to acquire / convert these new customers, and gamification of shopping to drive continued engagement, habit building, and repeat purchases.
Given all of this, and the strong (but early) traction in the local Shopee Brazil marketplace, investors need to keep an eye on this development. It is the smallest GMV contribution among Shopee’s countries currently, but a large inherent call option in the valuation. Something that so far, seems greatly underappreciated. I suspect at some point in the near future, Shopee’s management team will disclose more on the initiative, and at which point investors will be surprised by how Shopee managed to quietly build one of the largest marketplaces in Brazil.”
You can also take a peek at 10 Blue Chip Dividend Stocks Hedge Funds Are Buying and 14 Best European Dividend Stocks To Buy.
