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 Twitter Inc (NYSE:TWTR) and determine whether hedge funds had an edge regarding this stock.
Twitter Inc (NYSE:TWTR) has experienced an increase in support from the world’s most elite money managers of late. Twitter was in 68 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 55. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 55 hedge funds in our database with TWTR holdings at the end of March. Our calculations also showed that TWTR 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.
David Tepper of Appaloosa Management LP
At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. 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. With all of this in mind let’s go over the recent hedge fund action regarding Twitter Inc (NYSE:TWTR).
How are hedge funds trading Twitter Inc (NYSE:TWTR)?
At the end of the second quarter, a total of 68 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from the previous quarter. On the other hand, there were a total of 47 hedge funds with a bullish position in TWTR a year ago. With the smart money’s capital changing hands, there exists a few key hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).
More specifically, Appaloosa Management LP was the largest shareholder of Twitter Inc (NYSE:TWTR), with a stake worth $165.3 million reported as of the end of September. Trailing Appaloosa Management LP was Southpoint Capital Advisors, which amassed a stake valued at $163.8 million. Citadel Investment Group, Tremblant Capital, and Elliott Investment Management 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 Kerrisdale Capital allocated the biggest weight to Twitter Inc (NYSE:TWTR), around 9.94% of its 13F portfolio. Kingstown Capital Management is also relatively very bullish on the stock, designating 9.12 percent of its 13F equity portfolio to TWTR.
As aggregate interest increased, key money managers were breaking ground themselves. SRS Investment Management, managed by Karthik Sarma, initiated the most outsized position in Twitter Inc (NYSE:TWTR). SRS Investment Management had $98 million invested in the company at the end of the quarter. Steve Cohen’s Point72 Asset Management also made a $41.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael A. Price and Amos Meron’s Empyrean Capital Partners, David Brown’s Hawk Ridge Management, and Leon Shaulov’s Maplelane Capital.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Twitter Inc (NYSE:TWTR) but similarly valued. These stocks are Marvell Technology Group Ltd. (NASDAQ:MRVL), American Water Works Company, Inc. (NYSE:AWK), XP Inc. (NASDAQ:XP), The Williams Companies, Inc. (NYSE:WMB), Ecopetrol S.A. (NYSE:EC), Fortive Corporation (NYSE:FTV), and China Telecom Corporation Limited (NYSE:CHA). This group of stocks’ market values resemble TWTR’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MRVL | 41 | 664690 | 12 |
| AWK | 30 | 653000 | 0 |
| XP | 21 | 430821 | 8 |
| WMB | 41 | 466723 | -6 |
| EC | 11 | 113508 | -1 |
| FTV | 35 | 1372140 | 0 |
| CHA | 5 | 30145 | 0 |
| Average | 26.3 | 533004 | 1.9 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 26.3 hedge funds with bullish positions and the average amount invested in these stocks was $533 million. That figure was $1278 million in TWTR’s case. Marvell Technology Group Ltd. (NASDAQ:MRVL) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Twitter Inc (NYSE:TWTR) is more popular among hedge funds. Our overall hedge fund sentiment score for TWTR 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 returned 28.2% in 2020 through August 24th but still managed to beat the market by 20.6 percentage points. Hedge funds were also right about betting on TWTR as the stock returned 35.9% since the end of June 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.
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Disclosure: None. This article was originally published at Insider Monkey.
