Was The Smart Money Right About Piling Into Splunk Inc (SPLK)?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to Splunk Inc (NASDAQ:SPLK) changed recently.

Splunk Inc (NASDAQ:SPLK) investors should pay attention to an increase in activity from the world’s largest hedge funds in recent months. Splunk Inc (NASDAQ:SPLK) was in 49 hedge funds’ portfolios at the end of June. The all time high for this statistics is 39. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that SPLK 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.

Mark Kingdon of Kingdon Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let’s check out the fresh hedge fund action surrounding Splunk Inc (NASDAQ:SPLK).

How have hedgies been trading Splunk Inc (NASDAQ:SPLK)?

Heading into the third quarter of 2020, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 32% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in SPLK over the last 20 quarters. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

The largest stake in Splunk Inc (NASDAQ:SPLK) was held by Holocene Advisors, which reported holding $156.9 million worth of stock at the end of September. It was followed by Iridian Asset Management with a $85.3 million position. Other investors bullish on the company included Citadel Investment Group, PEAK6 Capital Management, and Jericho Capital Asset Management. In terms of the portfolio weights assigned to each position North Peak Capital allocated the biggest weight to Splunk Inc (NASDAQ:SPLK), around 12.39% of its 13F portfolio. Whetstone Capital Advisors is also relatively very bullish on the stock, setting aside 6.85 percent of its 13F equity portfolio to SPLK.

As industrywide interest jumped, specific money managers were breaking ground themselves. Jericho Capital Asset Management, managed by Josh Resnick, initiated the biggest position in Splunk Inc (NASDAQ:SPLK). Jericho Capital Asset Management had $68.4 million invested in the company at the end of the quarter. Mark Moore’s ThornTree Capital Partners also initiated a $27.4 million position during the quarter. The following funds were also among the new SPLK investors: Larry Chen and Terry Zhang’s Tairen Capital, John Hurley’s Cavalry Asset Management, and Mark Kingdon’s Kingdon Capital.

Let’s go over hedge fund activity in other stocks similar to Splunk Inc (NASDAQ:SPLK). We will take a look at Orange SA (NYSE:ORAN), Phillips 66 (NYSE:PSX), Mizuho Financial Group Inc. (NYSE:MFG), O’Reilly Automotive Inc (NASDAQ:ORLY), Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), Southern Copper Corporation (NYSE:SCCO), and Twilio Inc. (NYSE:TWLO). All of these stocks’ market caps are similar to SPLK’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.7 hedge funds with bullish positions and the average amount invested in these stocks was $1095 million. That figure was $874 million in SPLK’s case. Twilio Inc. (NYSE:TWLO) is the most popular stock in this table. On the other hand Orange SA (NYSE:ORAN) is the least popular one with only 3 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 overall hedge fund sentiment score for SPLK is 76.5. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately SPLK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on SPLK were disappointed as the stock returned 9% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.