We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether Zynga Inc (NASDAQ:ZNGA) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Zynga Inc (NASDAQ:ZNGA) has experienced an increase in hedge fund sentiment recently. Our calculations also showed that ZNGA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 41 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Ken Griffin of Citadel Investment Group
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a glance at the new hedge fund action regarding Zynga Inc (NASDAQ:ZNGA).
How have hedgies been trading Zynga Inc (NASDAQ:ZNGA)?
At the end of the fourth quarter, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from one quarter earlier. On the other hand, there were a total of 29 hedge funds with a bullish position in ZNGA a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Zynga Inc (NASDAQ:ZNGA) was held by Iridian Asset Management, which reported holding $143.2 million worth of stock at the end of September. It was followed by Cadian Capital with a $139.2 million position. Other investors bullish on the company included Two Sigma Advisors, Renaissance Technologies, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Shelter Haven Capital Management allocated the biggest weight to Zynga Inc (NASDAQ:ZNGA), around 17.46% of its 13F portfolio. Tiger Legatus Capital is also relatively very bullish on the stock, designating 11.49 percent of its 13F equity portfolio to ZNGA.
With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Shelter Haven Capital Management, managed by Jerry Kochanski, assembled the most outsized position in Zynga Inc (NASDAQ:ZNGA). Shelter Haven Capital Management had $36.6 million invested in the company at the end of the quarter. Joe Milano’s Greenhouse Funds also initiated a $16.7 million position during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Ben Gordon’s Blue Grotto Capital, and Noam Gottesman’s GLG Partners.
Let’s check out hedge fund activity in other stocks similar to Zynga Inc (NASDAQ:ZNGA). We will take a look at Capri Holdings Limited (NYSE:CPRI), SolarWinds Corporation (NYSE:SWI), Choice Hotels International, Inc. (NYSE:CHH), and Allison Transmission Holdings Inc (NYSE:ALSN). This group of stocks’ market values are closest to ZNGA’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CPRI | 40 | 1033626 | -1 |
| SWI | 15 | 2527306 | 2 |
| CHH | 16 | 124873 | -6 |
| ALSN | 33 | 769433 | 2 |
| Average | 26 | 1113810 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26 hedge funds with bullish positions and the average amount invested in these stocks was $1114 million. That figure was $953 million in ZNGA’s case. Capri Holdings Limited (NYSE:CPRI) is the most popular stock in this table. On the other hand SolarWinds Corporation (NYSE:SWI) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Zynga Inc (NASDAQ:ZNGA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still managed to beat the market by 5.5 percentage points. Hedge funds were also right about betting on ZNGA as the stock returned 1.5% so far in Q1 (through March 25th) 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
