Coronavirus is probably the #1 concern in investors’ minds right now. It should be. We estimate that COVID-19 will kill around 5 million people worldwide and there is a 3.3% probability that Donald Trump will die from the new coronavirus (read the details). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Electronic Arts Inc. (NASDAQ:EA)? The smart money sentiment can provide an answer to this question.
Electronic Arts Inc. (NASDAQ:EA) shareholders have witnessed a decrease in support from the world’s most elite money managers in recent months. EA was in 68 hedge funds’ portfolios at the end of December. There were 70 hedge funds in our database with EA positions at the end of the previous quarter. Our calculations also showed that EA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to 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 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.
Cliff Asness of AQR Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. With all of this in mind we’re going to view the recent hedge fund action encompassing Electronic Arts Inc. (NASDAQ:EA).
How are hedge funds trading Electronic Arts Inc. (NASDAQ:EA)?
Heading into the first quarter of 2020, a total of 68 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in EA over the last 18 quarters. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
More specifically, AQR Capital Management was the largest shareholder of Electronic Arts Inc. (NASDAQ:EA), with a stake worth $352.9 million reported as of the end of September. Trailing AQR Capital Management was D E Shaw, which amassed a stake valued at $267.5 million. Eminence Capital, SRS Investment Management, and Two Sigma Advisors 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 Anavon Capital allocated the biggest weight to Electronic Arts Inc. (NASDAQ:EA), around 14.29% of its 13F portfolio. SoMa Equity Partners is also relatively very bullish on the stock, designating 9.19 percent of its 13F equity portfolio to EA.
Since Electronic Arts Inc. (NASDAQ:EA) has experienced falling interest from the smart money, logic holds that there lies a certain “tier” of fund managers that elected to cut their full holdings last quarter. It’s worth mentioning that Aaron Cowen’s Suvretta Capital Management dropped the biggest investment of all the hedgies watched by Insider Monkey, worth an estimated $82.5 million in call options. Gil Simon’s fund, SoMa Equity Partners, also sold off its call options, about $39.1 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 2 funds last quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Electronic Arts Inc. (NASDAQ:EA) but similarly valued. We will take a look at Hilton Worldwide Holdings Inc (NYSE:HLT), ONEOK, Inc. (NYSE:OKE), Zimmer Biomet Holdings Inc (NYSE:ZBH), and The Hershey Company (NYSE:HSY). This group of stocks’ market caps match EA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| HLT | 57 | 4450016 | 4 |
| OKE | 31 | 223513 | 5 |
| ZBH | 64 | 1443573 | 15 |
| HSY | 39 | 901147 | 3 |
| Average | 47.75 | 1754562 | 6.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 47.75 hedge funds with bullish positions and the average amount invested in these stocks was $1755 million. That figure was $2360 million in EA’s case. Zimmer Biomet Holdings Inc (NYSE:ZBH) is the most popular stock in this table. On the other hand ONEOK, Inc. (NYSE:OKE) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks Electronic Arts Inc. (NASDAQ:EA) 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 also gained 0.1% in 2020 through March 2nd and beat the market by 4.1 percentage points. Hedge funds were also right about betting on EA, though not to the same extent, as the stock returned -0.6% during the first quarter (through March 2nd) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.
