Alibaba Group Holding Ltd (BABA): Does Hedge Fund Sentiment Indicate Big Things Ahead?

The world’s second-largest economy, China, has been undergoing a rather painful transition from an infrastructure-based economy to one that focuses on consumer spending. The country’s government officials as well as global investors anticipate slower growth throughout this transition, but China’s woes are mounting on a daily basis. In fact, government officials have claimed that the growth in services and consumer spending is gaining steam, which is nonetheless not enough to carry the entire economy on its shoulders. Meanwhile, global investors look at Alibaba Group Holding Ltd (NYSE:BABA) as a pure reflection of the state of the country’s economy, so short interest in China’s largest online retailer has been extremely high thus far in 2016. For that reason, we decided to examine what billionaires and hedge funds think of this company.

Alibaba Group Holding Ltd (NYSE:BABA) has experienced an increase in activity from the world’s best hedge funds in recent months. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Anheuser-Busch InBev NV (ADR) (NYSE:BUD), Pfizer Inc. (NYSE:PFE), and Wal-Mart Stores, Inc. (NYSE:WMT) to gather more data points.

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The American depositary receipts of Alibaba Group Holding Ltd (NYSE:BABA) are down by 12% since the beginning of 2016, presumably because of worries and concerns over the health of China’s economy. At the end of the day, more than two-thirds of the e-commerce giant’s revenue is derived from its China retail marketplaces. These marketplaces include Taobao Marketplace, China’s largest online shopping destination; Tmall, a third-party platform for brands and retailers; and Juhyasuan. However, Alibaba registered significant growth in its core business in the third quarter of fiscal year 2016 that ended December 31, as its revenue grew by 32% year-over-year and China retail marketplace revenue grew by 35% year-over-year. More importantly, the company’s China retail marketplaces registered 407 million annual active buyers in the 12-month period that ended December 31, up from 386 million in the 12-month period that ended September 30. Alibaba Group Holding Ltd’s gross merchandise volume on its China retail marketplaces totaled RMB964 billion ($149 billion) in the fiscal third quarter, which marked an increase of 23% year-over-year. This increase was mainly attributable to the sustained growth in its China commerce retail business, so Alibaba is not necessarily a reflection of the state of the world’s second-largest economy. Assuming for just a second that China will successfully complete its transition from an infrastructure-based economy to one focused on consumer spending, Alibaba will definitely represent one of the biggest winners of this transition.

With all of this in mind, we’re going to take a peek at the fresh action regarding Alibaba Group Holding Ltd (NYSE:BABA) on the next page, as well as a bearish take on the stock from a top investor that we track. 

At the end of 2015, renowned short-seller Jim Chanos, founder of Kynikos Associates, pitched Alibaba Group Holding Ltd (NYSE:BABA) as a short-sale bet at the Morgan Stanley Lyford conference, citing “accounting concerns”. The short-selling specialist has expressed his bearish view on China on multiple occasions, so Alibaba’s potential “accounting” issues, along with the nation’s economic woes, might yield the perfect short-selling thesis. Nonetheless, the e-commerce giant continues to achieve exceptional growth despite facing fast-mounting problems in the Chinese economy, so it’s a difficult company to get a good read on. Let’s now look at how the stock was traded in the fourth quarter by the entirety of the hedge funds tracked by Insider Monkey.

How are hedge funds trading Alibaba Group Holding Ltd (NYSE:BABA)?

Heading into 2016, a total of 77 of the hedge funds tracked by Insider Monkey were long this stock, a 28% jump from the third quarter. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings significantly (or had already accumulated large positions).

Of the funds tracked by Insider Monkey, Jim Davidson, Dave Roux and Glenn Hutchins’ Silver Lake Partners has the most valuable position in Alibaba Group Holding Ltd (NYSE:BABA), worth close to $1.99 billion, comprising 28.1% of its total 13F portfolio. On Silver Lake Partners’ heels is Rob Citrone of Discovery Capital Management, with a $861.5 million position; his fund has 10.2% of its 13F portfolio invested in the stock. Some other peers that are bullish include Boykin Curry’s Eagle Capital Management and Ken Griffin’s Citadel Investment Group.

Now, some big names were breaking ground themselves. Silver Lake Partners assembled the largest position in Alibaba Group Holding Ltd (NYSE:BABA). Silver Lake Partners had $1.99 billion invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $172.5 million position during the quarter. The following funds were also among the new BABA investors: Eric W. Mandelblatt’s Soroban Capital Partners, Panayotis Takis Sparaggis’ Alkeon Capital Management, and Christopher James’ Partner Fund Management.

On the final page, we’ll compare Alibaba’s popularity to stocks with a similar market cap.

Let’s now review hedge fund activity in other stocks similar to Alibaba Group Holding Ltd (NYSE:BABA). We will take a look at Anheuser-Busch InBev NV (ADR) (NYSE:BUD), Pfizer Inc. (NYSE:PFE), Wal-Mart Stores, Inc. (NYSE:WMT), and Royal Dutch Shell plc (ADR) (NYSE:RDS). All of these stocks’ market caps resemble BABA’s market cap.

As you can see these stocks had an average of 56 hedge funds with bullish positions and the average amount invested in these stocks was $5.53 billion. That figure was $6.74 billion in BABA’s case. Pfizer Inc. (NYSE:PFE) is the most popular stock in this table. On the other hand Royal Dutch Shell plc (ADR) (NYSE:RDS) is the least popular one with only 28 bullish hedge fund positions. Alibaba Group Holding Ltd (NYSE:BABA) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal, especially when coupled with fast-rising hedge fund interest. However there are a lot of variables to consider, so one should thoroughly research the stock before committing to a long position.

Disclosure: None