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 Zillow Group Inc (NASDAQ:Z) and determine whether hedge funds had an edge regarding this stock.
Is Zillow Group Inc (NASDAQ:Z) a buy here? Prominent investors were reducing their bets on the stock. The number of long hedge fund bets went down by 9 recently. Zillow Group Inc (NASDAQ:Z) was in 67 hedge funds’ portfolios at the end of September. The all time high for this statistic is 83. Our calculations also showed that Z isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings). There were 76 hedge funds in our database with Z holdings at the end of June.
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. Now let’s review the key hedge fund action encompassing Zillow Group Inc (NASDAQ:Z).
Gil Simon of SoMa Equity Partners
Do Hedge Funds Think Z Is A Good Stock To Buy Now?
At the end of the third quarter, a total of 67 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -12% from one quarter earlier. On the other hand, there were a total of 69 hedge funds with a bullish position in Z a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
More specifically, ARK Investment Management was the largest shareholder of Zillow Group Inc (NASDAQ:Z), with a stake worth $994.8 million reported as of the end of September. Trailing ARK Investment Management was SRS Investment Management, which amassed a stake valued at $643.8 million. Coatue Management, SoMa Equity Partners, and Citadel Investment Group 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 Valiant Capital allocated the biggest weight to Zillow Group Inc (NASDAQ:Z), around 9.22% of its 13F portfolio. SRS Investment Management is also relatively very bullish on the stock, dishing out 9.05 percent of its 13F equity portfolio to Z.
Because Zillow Group Inc (NASDAQ:Z) has faced declining sentiment from hedge fund managers, it’s easy to see that there is a sect of funds who were dropping their positions entirely by the end of the third quarter. Interestingly, Panayotis Takis Sparaggis’s Alkeon Capital Management dropped the largest position of the 750 funds tracked by Insider Monkey, totaling close to $122.2 million in stock, and Josh Resnick’s Jericho Capital Asset Management was right behind this move, as the fund said goodbye to about $101.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 9 funds by the end of the third quarter.
Let’s now review hedge fund activity in other stocks similar to Zillow Group Inc (NASDAQ:Z). We will take a look at Monolithic Power Systems, Inc. (NASDAQ:MPWR), Xylem Inc (NYSE:XYL), Hormel Foods Corporation (NYSE:HRL), Imperial Oil Limited (NYSE:IMO), Bio-Rad Laboratories, Inc. (NYSE:BIO), Qualtrics International Inc. (NASDAQ:XM), and Warner Music Group Corp. (NASDAQ:WMG). All of these stocks’ market caps resemble Z’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MPWR | 28 | 799034 | -6 |
| XYL | 22 | 821321 | -1 |
| HRL | 29 | 476824 | 5 |
| IMO | 10 | 99009 | -5 |
| BIO | 38 | 1442180 | -3 |
| XM | 26 | 1694438 | -11 |
| WMG | 28 | 972824 | -1 |
| Average | 25.9 | 900804 | -3.1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.9 hedge funds with bullish positions and the average amount invested in these stocks was $901 million. That figure was $4251 million in Z’s case. Bio-Rad Laboratories, Inc. (NYSE:BIO) is the most popular stock in this table. On the other hand Imperial Oil Limited (NYSE:IMO) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Zillow Group Inc (NASDAQ:Z) is more popular among hedge funds. Our overall hedge fund sentiment score for Z is 70.2. 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 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 still beat the market by 3.6 percentage points. Unfortunately, Z wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on Z were disappointed as the stock returned -42.7% since the end of the third quarter (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.
