Hedge Funds Betting Big On Datadog, Inc. (DDOG)

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). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. 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 Datadog, Inc. (NASDAQ:DDOG) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Datadog, Inc. (NASDAQ:DDOG) investors should pay attention to an increase in enthusiasm from smart money of late. Datadog, Inc. (NASDAQ:DDOG) was in 57 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 44 hedge funds in our database with DDOG positions at the end of the first quarter. Our calculations also showed that DDOG isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

Chase Coleman of Tiger Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind let’s analyze the new hedge fund action surrounding Datadog, Inc. (NASDAQ:DDOG).

What does smart money think about Datadog, Inc. (NASDAQ:DDOG)?

At the end of the second quarter, a total of 57 of the hedge funds tracked by Insider Monkey were long this stock, a change of 30% from the first quarter of 2020. By comparison, 0 hedge funds held shares or bullish call options in DDOG a year ago. With hedge funds’ sentiment swirling, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Lone Pine Capital has the number one position in Datadog, Inc. (NASDAQ:DDOG), worth close to $594.1 million, comprising 3% of its total 13F portfolio. Sitting at the No. 2 spot is Alex Sacerdote of Whale Rock Capital Management, with a $471.1 million position; the fund has 3.8% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism comprise Chase Coleman’s Tiger Global Management LLC, Renaissance Technologies and Philippe Laffont’s Coatue Management. In terms of the portfolio weights assigned to each position Stepstone Group allocated the biggest weight to Datadog, Inc. (NASDAQ:DDOG), around 83.87% of its 13F portfolio. Ariose Capital is also relatively very bullish on the stock, designating 9.75 percent of its 13F equity portfolio to DDOG.

With a general bullishness amongst the heavyweights, key money managers were breaking ground themselves. Lone Pine Capital, assembled the most outsized position in Datadog, Inc. (NASDAQ:DDOG). Lone Pine Capital had $594.1 million invested in the company at the end of the quarter. Yi Xin’s Ariose Capital also initiated a $13.7 million position during the quarter. The following funds were also among the new DDOG investors: Louis Bacon’s Moore Global Investments, Bijan Modanlou, Joseph Bou-Saba, and Jayaveera Kodali’s Alta Park Capital, and Nancy Zevenbergen’s Zevenbergen Capital Investments.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Datadog, Inc. (NASDAQ:DDOG) but similarly valued. We will take a look at Hormel Foods Corporation (NYSE:HRL), PACCAR Inc (NASDAQ:PCAR), AFLAC Incorporated (NYSE:AFL), Suncor Energy Inc. (NYSE:SU), Sirius XM Holdings Inc (NASDAQ:SIRI), Cummins Inc. (NYSE:CMI), and Schlumberger Limited. (NYSE:SLB). This group of stocks’ market valuations are closest to DDOG’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.1 hedge funds with bullish positions and the average amount invested in these stocks was $649 million. That figure was $2363 million in DDOG’s case. Schlumberger Limited. (NYSE:SLB) is the most popular stock in this table. On the other hand Hormel Foods Corporation (NYSE:HRL) is the least popular one with only 27 bullish hedge fund positions. Compared to these stocks Datadog, Inc. (NASDAQ:DDOG) is more popular among hedge funds. Our overall hedge fund sentiment score for DDOG is 90. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 28.2% in 2020 through August 24th and still beat the market by 20.6 percentage points. Unfortunately DDOG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on DDOG were disappointed as the stock returned -3% since the end of the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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