Alibaba Group Holding Ltd (NYSE:BABA) shares are down by 3.5% this morning after Bloomberg reported that the SEC is investigating the company over its accounting practices. The SEC is specifically investigating Alibaba’s consolidation practices relating to the data reported from the company’s Singles’ Day promotion. Alibaba is cooperating with the SEC and has released the following statement:
“The SEC advised us that the initiation of a request for information should not be construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred. This matter is ongoing, and, as with any regulatory proceeding, we cannot predict when it will be concluded.”
The investigation comes just a couple of weeks after famed short-seller Jim Chanos, who has declared being short Alibaba in the past, stated that the company’s accounting was some of the worst he had ever seen. Speaking at the SALT hedge fund conference in Las Vegas on May 12, Mr. Chanos said:
“The accounting at Alibaba is some of the most questionable I have ever seen for a major multi-billion market cap company that went public,” adding that “What the company is really earning we don’t know.”
We can judge whether Alibaba Group Holding Ltd (NYSE:BABA) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, research shows that these picks historically outperformed the market when we factor in known risk factors.
Is Alibaba Group Holding Ltd (NYSE:BABA) an exceptional investment now? Prominent investors are reducing their bets on the stock. The number of long hedge fund bets dropped by 10 in Q1. BABA was in 67 hedge funds’ portfolios at the end of March. There were 77 hedge funds in our database with BABA positions at the end of the previous quarter. 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 Pfizer Inc. (NYSE:PFE), Chevron Corporation (NYSE:CVX), and Royal Dutch Shell plc (ADR) (NYSE:RDS) to gather more data points.
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At Insider Monkey, we track over 750 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).
According to Insider Monkey’s hedge fund database, Jim Davidson, Dave Roux and Glenn Hutchins’ Silver Lake Partners has the biggest position in Alibaba Group Holding Ltd (NYSE:BABA), worth close to $1.61 billion, amounting to 26.9% of its total 13F portfolio. Sitting at the No. 2 spot is Rob Citrone of Discovery Capital Management, with a $474.3 million position; the fund has 6.9% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish encompass Boykin Curry’s Eagle Capital Management, Daniel S. Och’s OZ Management, and Ken Fisher’s Fisher Asset Management.
On the next page we’ll look at some funds that sold off their positions in Alibaba during Q1, as well as compare the stock to a handful of others with similar market caps.
Seeing as Alibaba Group Holding Ltd (NYSE:BABA) has witnessed bearish sentiment from the entirety of the hedge funds we track, logic holds that there were a few fund managers who sold off their full holdings in the fourth quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital sold off the biggest stake of the “upper crust” of funds monitored by Insider Monkey, comprising about $172.5 million in stock. Bain Capital’s fund, Brookside Capital, also dumped its stock, about $118.1 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 10 funds in the fourth quarter.
Let’s now take a look at hedge fund activity in other stocks similar to Alibaba Group Holding Ltd (NYSE:BABA). These stocks are Pfizer Inc. (NYSE:PFE), Chevron Corporation (NYSE:CVX), Royal Dutch Shell plc (ADR) (NYSE:RDS), and Novartis AG (ADR) (NYSE:NVS). This group of stocks’ market values are closest to BABA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| PFE | 119 | 8371790 | 10 |
| CVX | 46 | 1713423 | 2 |
| RDS | 34 | 915808 | 6 |
| NVS | 22 | 884780 | -3 |
As you can see these stocks had an average of 55 hedge funds with bullish positions and the average amount invested in these stocks was $2.97 billion. That figure was $5.14 billion in BABA’s case. Pfizer Inc. (NYSE:PFE) is the most popular stock in this table. On the other hand Novartis AG (ADR) (NYSE:NVS) is the least popular one with only 22 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 but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard PFE might be a better candidate to consider a long position.
Disclosure: None
