Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Shopify Inc (NYSE:SHOP).
Is Shopify Inc (NYSE:SHOP) a worthy investment today? The smart money is becoming less confident. The number of long hedge fund positions shrunk by 7 recently. Our calculations also showed that SHOP 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Stephen Mandel of Lone Pine Capital
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. Now let’s take a gander at the new hedge fund action regarding Shopify Inc (NYSE:SHOP).
What does smart money think about Shopify Inc (NYSE:SHOP)?
At the end of the fourth quarter, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SHOP over the last 18 quarters. With hedgies’ capital changing hands, there exists a few key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).
Among these funds, Lone Pine Capital held the most valuable stake in Shopify Inc (NYSE:SHOP), which was worth $720.7 million at the end of the third quarter. On the second spot was Citadel Investment Group which amassed $399.7 million worth of shares. Abdiel Capital Advisors, SCGE Management, and Whale Rock Capital 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 Strategy Capital allocated the biggest weight to Shopify Inc (NYSE:SHOP), around 33.17% of its 13F portfolio. Abdiel Capital Advisors is also relatively very bullish on the stock, earmarking 23.5 percent of its 13F equity portfolio to SHOP.
Due to the fact that Shopify Inc (NYSE:SHOP) has faced a decline in interest from hedge fund managers, it’s safe to say that there lies a certain “tier” of hedgies that decided to sell off their entire stakes by the end of the third quarter. It’s worth mentioning that Stanley Druckenmiller’s Duquesne Capital said goodbye to the biggest position of all the hedgies watched by Insider Monkey, worth an estimated $66.2 million in stock, and Renaissance Technologies was right behind this move, as the fund cut about $37.1 million worth. These bearish behaviors are interesting, as total hedge fund interest fell by 7 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Shopify Inc (NYSE:SHOP) but similarly valued. We will take a look at Simon Property Group, Inc (NYSE:SPG), UBS Group AG (NYSE:UBS), Activision Blizzard, Inc. (NASDAQ:ATVI), and Banco Santander (Brasil) SA (NYSE:BSBR). This group of stocks’ market values are similar to SHOP’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SPG | 26 | 579726 | -3 |
| UBS | 14 | 1045423 | -2 |
| ATVI | 76 | 2811204 | 3 |
| BSBR | 8 | 91437 | -7 |
| Average | 31 | 1131948 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $1132 million. That figure was $3076 million in SHOP’s case. Activision Blizzard, Inc. (NASDAQ:ATVI) is the most popular stock in this table. On the other hand Banco Santander (Brasil) SA (NYSE:BSBR) is the least popular one with only 8 bullish hedge fund positions. Shopify Inc (NYSE:SHOP) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but still beat the market by 3.1 percentage points. A small number of hedge funds were also right about betting on SHOP as the stock returned 6.2% during the same time period and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
