Was The Smart Money Right About Zynga Inc (ZNGA)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Zynga Inc (NASDAQ:ZNGA).

Zynga Inc (NASDAQ:ZNGA) was in 52 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 59. ZNGA has seen a decrease in hedge fund sentiment in recent months. There were 59 hedge funds in our database with ZNGA holdings at the end of March. Our calculations also showed that ZNGA 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Harold Levy of Iridian Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging 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. Now we’re going to take a look at the latest hedge fund action encompassing Zynga Inc (NASDAQ:ZNGA).

Hedge fund activity in Zynga Inc (NASDAQ:ZNGA)

At the end of June, a total of 52 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from the first quarter of 2020. On the other hand, there were a total of 48 hedge funds with a bullish position in ZNGA a year ago. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Renaissance Technologies has the number one position in Zynga Inc (NASDAQ:ZNGA), worth close to $165.5 million, amounting to 0.1% of its total 13F portfolio. On Renaissance Technologies’s heels is Iridian Asset Management, led by David Cohen and Harold Levy, holding a $150.1 million position; 3.3% of its 13F portfolio is allocated to the stock. Remaining members of the smart money that hold long positions comprise Eric Bannasch’s Cadian Capital, John Overdeck and David Siegel’s Two Sigma Advisors and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Shelter Haven Capital Management allocated the biggest weight to Zynga Inc (NASDAQ:ZNGA), around 7.55% of its 13F portfolio. Tiger Legatus Capital is also relatively very bullish on the stock, setting aside 6.9 percent of its 13F equity portfolio to ZNGA.

Because Zynga Inc (NASDAQ:ZNGA) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few hedge funds who sold off their full holdings by the end of the second quarter. At the top of the heap, Bruce Emery’s Greenvale Capital dropped the biggest stake of all the hedgies watched by Insider Monkey, valued at about $48 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund said goodbye to about $38.2 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut by 7 funds by the end of the second quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Zynga Inc (NASDAQ:ZNGA) but similarly valued. These stocks are PulteGroup, Inc. (NYSE:PHM), Suzano S.A. (NYSE:SUZ), Vistra Corp. (NYSE:VST), MGM Growth Properties LLC (NYSE:MGP), Kinross Gold Corporation (NYSE:KGC), PTC Inc (NASDAQ:PTC), and Dropbox, Inc. (NASDAQ:DBX). This group of stocks’ market caps resemble ZNGA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.3 hedge funds with bullish positions and the average amount invested in these stocks was $916 million. That figure was $1095 million in ZNGA’s case. Dropbox, Inc. (NASDAQ:DBX) is the most popular stock in this table. On the other hand Suzano S.A. (NYSE:SUZ) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Zynga Inc (NASDAQ:ZNGA) is more popular among hedge funds. Our overall hedge fund sentiment score for ZNGA is 74.4. 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. 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 still beat the market by 21 percentage points. Unfortunately ZNGA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ZNGA were disappointed as the stock returned -1% since the end of the second quarter (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 most of these stocks already outperformed the market in 2020.

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