Hedge Funds Have Never Been This Bullish On Roku, Inc. (ROKU)

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Roku, Inc. (NASDAQ:ROKU).

Is Roku, Inc. (NASDAQ:ROKU) a buy right now? Prominent investors are taking a bullish view. The number of bullish hedge fund bets moved up by 4 in recent months. Our calculations also showed that ROKU isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

John Overdeck of Two Sigma Advisors

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s take a gander at the fresh hedge fund action encompassing Roku, Inc. (NASDAQ:ROKU).

Hedge fund activity in Roku, Inc. (NASDAQ:ROKU)

Heading into the fourth quarter of 2019, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the previous quarter. The graph below displays the number of hedge funds with bullish position in ROKU over the last 17 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.

According to Insider Monkey’s hedge fund database, Alex Sacerdote’s Whale Rock Capital Management has the number one position in Roku, Inc. (NASDAQ:ROKU), worth close to $123.1 million, comprising 2.3% of its total 13F portfolio. The second largest stake is held by Citadel Investment Group, managed by Ken Griffin, which holds a $32 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors with similar optimism comprise David E. Shaw’s D E Shaw, Mike Ogborne’s Ogborne Capital and John Overdeck and David Siegel’s Two Sigma Advisors. In terms of the portfolio weights assigned to each position Ogborne Capital allocated the biggest weight to Roku, Inc. (NASDAQ:ROKU), around 14.53% of its portfolio. Empirical Capital Partners is also relatively very bullish on the stock, setting aside 8.06 percent of its 13F equity portfolio to ROKU.

As industrywide interest jumped, some big names were breaking ground themselves. Two Sigma Advisors, managed by John Overdeck and David Siegel, initiated the most outsized position in Roku, Inc. (NASDAQ:ROKU). Two Sigma Advisors had $18 million invested in the company at the end of the quarter. Seth Wunder’s Black-and-White Capital also made a $10.2 million investment in the stock during the quarter. The following funds were also among the new ROKU investors: Paul Marshall and Ian Wace’s Marshall Wace, Cristan Blackman’s Empirical Capital Partners, and Benjamin A. Smith’s Laurion Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Roku, Inc. (NASDAQ:ROKU) but similarly valued. We will take a look at J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), Advance Auto Parts, Inc. (NYSE:AAP), Okta, Inc. (NASDAQ:OKTA), and Godaddy Inc (NYSE:GDDY). This group of stocks’ market caps are closest to ROKU’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 38.75 hedge funds with bullish positions and the average amount invested in these stocks was $1378 million. That figure was $322 million in ROKU’s case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) is the least popular one with only 22 bullish hedge fund positions. Roku, Inc. (NASDAQ:ROKU) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on ROKU as the stock returned 57.6% during the first two months of Q4 and outperformed the market by an even larger margin.

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