While the market driven by short-term sentiment influenced by uncertainty regarding the future of the interest rate environment in the US, the low commodity prices and the economic turmoil in China, many smart money investors are keeping their optimism regarding the current bull run, while still hedging many of their long positions. However, as we know, big investors usually buy stocks with strong fundamentals, which is why we believe we can profit from imitating them. Historically hedge funds’ consensus large-cap stock picks generated an annual alpha of about 2 percentage points. I wouldn’t be happy with their “net returns” after paying a 2% management fee and 20% incentive fees if I were a hedge fund client. However, this doesn’t change the fact that their picks are slightly better than passively investing in index funds.
You probably think that hedge funds’ long picks aren’t beating the market because of their high profile losses in Valeant (VRX) or energy stocks. You’d be wrong. We track more than 800 equity hedge funds and create a giant portfolio of their long holdings. This $1.6 trillion portfolio of large and small-cap stocks lost 4.7% through the end of February, and outperformed S&P 500 Total Return Index’s 5.2% loss. Small-cap index Russell 2000 lost 8.8% during the same period. In this article, we are going to take a look at the hedge fund sentiment surrounding Facebook Inc (NASDAQ:FB).
Facebook Inc (NASDAQ:FB) has experienced an increase in hedge fund sentiment in recent months. FB was in 146 hedge funds’ portfolios at the end of December. There were 128 hedge funds in our database with FB positions at the end of the previous quarter. Overall, Facebook is the third most popular stock among hedge funds and investors were rewarded with a 2.2% gain in the stock during the first 2 months of this year. Why do hedge funds like Facebook? Here is an excerpt from Silver Arrow Partners’ 2015 Q2 investor letter explaining their Facebook investment thesis:
Follow Meta Platforms Inc. (NASDAQ:META)
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“Facebook stands out among the large capitalization Internet companies as the one with the most growth catalysts for any company in the sector. First, the roll-out of video and video advertising is a major source of advertising revenue growth. In 2015, Facebook is already on track to host two-thirds of the video volume of YouTube, the industry leader, after having just entered the video market recently. Second, the Company is at the early stage of monetizing its Instagram application, which is larger and more popular than Twitter. Third, monthly active users at WhatsApp have dramatically grown to 900 million, well above the 400 million mark when it was acquired by Facebook. Like Instagram, Facebook is just beginning to monetize the WhatsApp asset. Finally, in 2016, the company will commercially release its Occulus VR product, which consists of virtual reality goggles and associated hardware/software, and which we believe will be a meaningful revenue contributor.”
Keeping this in mind, let’s review the latest action surrounding Facebook Inc (NASDAQ:FB).
How have hedgies been trading Facebook Inc (NASDAQ:FB)?
At Q4’s end, a total of 146 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 14% from the third quarter. With the smart money’s capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Lone Pine Capital, managed by Stephen Mandel, holds the number one position in Facebook Inc (NASDAQ:FB). Lone Pine Capital has a $1.02 billion position in the stock, comprising 4.4% of its 13F portfolio. The second largest stake is held by Coatue Management, led by another Tiger cub, holding a $691.9 million position; the fund has 6.9% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that hold long positions encompass John Armitage’s Egerton Capital Limited, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Israel Englander’s Millennium Management.
As aggregate interest increased, key hedge funds were breaking ground themselves. Soroban Capital Partners, managed by Eric W. Mandelblatt, initiated the most valuable call position in Facebook Inc (NASDAQ:FB). Soroban Capital Partners had $314 million invested in the Facebook’s call options at the end of the quarter. Jim Simons’s Renaissance Technologies also initiated a $187.6 million position during the quarter. Daniel S. Och’s OZ Management and Aaron Cowen’s Suvretta Capital Management also initiated positions in the social media giant during the quarter.
Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Facebook Inc (NASDAQ:FB) but similarly valued- to have an idea about the magnitude of hedge fund optimism in Facebook. These stocks are Johnson & Johnson (NYSE:JNJ), Wells Fargo & Co (NYSE:WFC), JPMorgan Chase & Co. (NYSE:JPM), and China Mobile Ltd. (ADR) (NYSE:CHL). This group of stocks’ market caps match FB’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| JNJ | 72 | 4162781 | -2 |
| WFC | 85 | 32556760 | 0 |
| JPM | 100 | 7576423 | 0 |
| CHL | 24 | 256853 | 4 |
As you can see these stocks had an average of 70.25 hedge funds with bullish positions and the average amount invested in these stocks was $11.1 billion. That figure was $10.8 billion in FB’s case. JPMorgan Chase & Co. (NYSE:JPM) is the most popular stock in this table. On the other hand China Mobile Ltd. (ADR) (NYSE:CHL) is the least popular one with only 24 bullish hedge fund positions. Facebook Inc (NASDAQ:FB) is twice as popular as these stocks among hedge funds. We usually invest in small-cap stocks, but if you are looking for a large-cap stock to invest in, Facebook is a great candidate.
