Amid an overall bull market, many stocks that smart money investors were collectively bullish on 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. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That’s why we weren’t surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Splunk Inc (NASDAQ:SPLK) a sound investment now? Prominent investors are in an optimistic mood. The number of bullish hedge fund positions inched up by 7 recently. Our calculations also showed that SPLK 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.
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 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.
David Harding of Winton Capital Management
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 analyze the recent hedge fund action surrounding Splunk Inc (NASDAQ:SPLK).
What does smart money think about Splunk Inc (NASDAQ:SPLK)?
At the end of the third quarter, a total of 32 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 28% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SPLK over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Citadel Investment Group was the largest shareholder of Splunk Inc (NASDAQ:SPLK), with a stake worth $34.4 million reported as of the end of September. Trailing Citadel Investment Group was Polar Capital, which amassed a stake valued at $23 million. Kayak Investment Partners, Balyasny Asset Management, and PDT Partners 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 Kayak Investment Partners allocated the biggest weight to Splunk Inc (NASDAQ:SPLK), around 7.03% of its portfolio. Boardman Bay Capital Management is also relatively very bullish on the stock, earmarking 3.24 percent of its 13F equity portfolio to SPLK.
As industrywide interest jumped, specific money managers were leading the bulls’ herd. Kayak Investment Partners, managed by Daryl Smith, initiated the most outsized position in Splunk Inc (NASDAQ:SPLK). Kayak Investment Partners had $12.4 million invested in the company at the end of the quarter. Brian Ashford-Russell and Tim Woolley’s Polar Capital also initiated a $10.1 million position during the quarter. The other funds with new positions in the stock are David Harding’s Winton Capital Management, Charles Davidson and Joseph Jacobs’s Wexford Capital, and Will Graves’s Boardman Bay Capital Management.
Let’s now review hedge fund activity in other stocks similar to Splunk Inc (NASDAQ:SPLK). We will take a look at CDW Corporation (NASDAQ:CDW), CBRE Group, Inc. (NYSE:CBRE), Western Digital Corporation (NASDAQ:WDC), and New Oriental Education & Tech Group Inc. (NYSE:EDU). This group of stocks’ market caps are similar to SPLK’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CDW | 26 | 1168154 | -3 |
| CBRE | 27 | 1095686 | 2 |
| WDC | 35 | 905397 | 10 |
| EDU | 35 | 1511145 | 3 |
| Average | 30.75 | 1170096 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $1170 million. That figure was $169 million in SPLK’s case. Western Digital Corporation (NASDAQ:WDC) is the most popular stock in this table. On the other hand CDW Corporation (NASDAQ:CDW) is the least popular one with only 26 bullish hedge fund positions. Splunk Inc (NASDAQ:SPLK) is not the most popular stock in this group but hedge fund interest is still above 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. Hedge funds were also right about betting on SPLK as the stock returned 26.6% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
