Did Hedge Funds Make The Right Call On iQIYI, Inc. (IQ)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards iQIYI, Inc. (NASDAQ:IQ) at the end of the first quarter and determine whether the smart money was really smart about this stock.

iQIYI, Inc. (NASDAQ:IQ) was in 28 hedge funds’ portfolios at the end of the first quarter of 2020. IQ investors should pay attention to an increase in activity from the world’s largest hedge funds recently. There were 18 hedge funds in our database with IQ holdings at the end of the previous quarter. Our calculations also showed that IQ 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Daniel Och, Founder of OZ Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a glance at the new hedge fund action surrounding iQIYI, Inc. (NASDAQ:IQ).

Hedge fund activity in iQIYI, Inc. (NASDAQ:IQ)

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 56% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in IQ over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Hillhouse Capital Management was the largest shareholder of iQIYI, Inc. (NASDAQ:IQ), with a stake worth $831.2 million reported as of the end of September. Trailing Hillhouse Capital Management was Kayak Investment Partners, which amassed a stake valued at $29 million. Serenity Capital, Tiger Global Management LLC, and Citadel Investment Group 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 Kayak Investment Partners allocated the biggest weight to iQIYI, Inc. (NASDAQ:IQ), around 12.85% of its 13F portfolio. Hillhouse Capital Management is also relatively very bullish on the stock, earmarking 11.2 percent of its 13F equity portfolio to IQ.

As one would reasonably expect, key money managers were breaking ground themselves. Kingdon Capital, managed by Mark Kingdon, initiated the largest position in iQIYI, Inc. (NASDAQ:IQ). Kingdon Capital had $15.4 million invested in the company at the end of the quarter. Pasco Alfaro / Richard Tumure’s Miura Global Management also made a $14.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Joe DiMenna’s ZWEIG DIMENNA PARTNERS,  Renaissance Technologies, and Li Ran’s Half Sky Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as iQIYI, Inc. (NASDAQ:IQ) but similarly valued. These stocks are Amcor plc (NYSE:AMCR), Leidos Holdings Inc (NYSE:LDOS), Nomura Holdings, Inc. (NYSE:NMR), and Markel Corporation (NYSE:MKL). All of these stocks’ market caps match IQ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $445 million. That figure was $983 million in IQ’s case. Markel Corporation (NYSE:MKL) is the most popular stock in this table. On the other hand Nomura Holdings, Inc. (NYSE:NMR) is the least popular one with only 5 bullish hedge fund positions. iQIYI, Inc. (NASDAQ:IQ) is not the most popular stock in this group but hedge fund interest is still above average. 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 gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on IQ as the stock returned 30.3% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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