Did Hedge Funds Make The Right Call On Etsy Inc (ETSY) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Etsy Inc (NASDAQ:ETSY) and determine whether hedge funds had an edge regarding this stock.

Is Etsy Inc (NASDAQ:ETSY) a buy right now? Investors who are in the know were turning less bullish. The number of bullish hedge fund bets were trimmed by 8 in recent months. Our calculations also showed that ETSY isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

David E. Shaw of D.E. Shaw

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind we’re going to take a glance at the new hedge fund action encompassing Etsy Inc (NASDAQ:ETSY).

What does smart money think about Etsy Inc (NASDAQ:ETSY)?

At the end of the first quarter, a total of 38 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ETSY over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Renaissance Technologies was the largest shareholder of Etsy Inc (NASDAQ:ETSY), with a stake worth $163.3 million reported as of the end of September. Trailing Renaissance Technologies was Cadian Capital, which amassed a stake valued at $151 million. D E Shaw, Valinor Management LLC, and Half Sky Capital were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Half Sky Capital allocated the biggest weight to Etsy Inc (NASDAQ:ETSY), around 19.73% of its 13F portfolio. Goodnow Investment Group is also relatively very bullish on the stock, designating 8.66 percent of its 13F equity portfolio to ETSY.

Since Etsy Inc (NASDAQ:ETSY) has experienced declining sentiment from the smart money, it’s safe to say that there lies a certain “tier” of hedge funds that elected to cut their full holdings last quarter. Intriguingly, Mark Moore’s ThornTree Capital Partners sold off the biggest position of the 750 funds watched by Insider Monkey, worth about $26.3 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also dumped its stock, about $21.5 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 8 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Etsy Inc (NASDAQ:ETSY). We will take a look at XPO Logistics Inc (NYSE:XPO), FTI Consulting, Inc. (NYSE:FCN), Santander Consumer USA Holdings Inc (NYSE:SC), and Nielsen Holdings plc (NYSE:NLSN). This group of stocks’ market caps are similar to ETSY’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $770 million. That figure was $713 million in ETSY’s case. XPO Logistics Inc (NYSE:XPO) is the most popular stock in this table. On the other hand FTI Consulting, Inc. (NYSE:FCN) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Etsy Inc (NASDAQ:ETSY) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on ETSY as the stock returned 176.4% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Disclosure: None. This article was originally published at Insider Monkey.