Were Expert Investors Right About Unity Software Inc. (U)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Unity Software Inc. (NYSE:U) and determine whether hedge funds skillfully traded this stock.

Is Unity Software Inc. (NYSE:U) the right investment to pursue these days? Prominent investors were getting more bullish. The number of long hedge fund positions moved up by 7 lately. Unity Software Inc. (NYSE:U) was in 36 hedge funds’ portfolios at the end of the third quarter of 2021. The all time high for this statistic is 39. Our calculations also showed that U isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind we’re going to analyze the recent hedge fund action regarding Unity Software Inc. (NYSE:U).

Brad Gerstner of Altimeter Capital

Do Hedge Funds Think U Is A Good Stock To Buy Now?

At the end of the third quarter, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the previous quarter. On the other hand, there were a total of 35 hedge funds with a bullish position in U a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Among these funds, Silver Lake Partners held the most valuable stake in Unity Software Inc. (NYSE:U), which was worth $5148.4 million at the end of the third quarter. On the second spot was ARK Investment Management which amassed $1503.5 million worth of shares. Altimeter Capital Management, Jasper Ridge Partners, and Marcho 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 Silver Lake Partners allocated the biggest weight to Unity Software Inc. (NYSE:U), around 31.61% of its 13F portfolio. Axel Capital Management is also relatively very bullish on the stock, setting aside 9.57 percent of its 13F equity portfolio to U.

Consequently, some big names were leading the bulls’ herd. Jericho Capital Asset Management, managed by Josh Resnick, established the most valuable position in Unity Software Inc. (NYSE:U). Jericho Capital Asset Management had $54.7 million invested in the company at the end of the quarter. Richard Driehaus’s Driehaus Capital also made a $32 million investment in the stock during the quarter. The following funds were also among the new U investors: Joseph Samuels’s Islet Management, Dmitry Balyasny’s Balyasny Asset Management, and D. E. Shaw’s D E Shaw.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Unity Software Inc. (NYSE:U) but similarly valued. We will take a look at DuPont de Nemours Inc (NYSE:DD), KKR & Co Inc. (NYSE:KKR), Otis Worldwide Corporation (NYSE:OTIS), AFLAC Incorporated (NYSE:AFL), The Hershey Company (NYSE:HSY), NatWest Group plc (NYSE:NWG), and Welltower Inc. (NYSE:WELL). All of these stocks’ market caps are similar to U’s market cap.

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As you can see these stocks had an average of 35.6 hedge funds with bullish positions and the average amount invested in these stocks was $1482 million. That figure was $7902 million in U’s case. KKR & Co Inc. (NYSE:KKR) is the most popular stock in this table. On the other hand NatWest Group plc (NYSE:NWG) is the least popular one with only 7 bullish hedge fund positions. Unity Software Inc. (NYSE:U) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for U is 67.3. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, U wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on U were disappointed as the stock returned -16.7% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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