Were Hedge Funds Right About Buying Booking Holdings Inc. (BKNG)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Booking Holdings Inc. (NASDAQ:BKNG).

Is Booking Holdings Inc. (NASDAQ:BKNG) a buy here? Money managers were buying. The number of bullish hedge fund bets went up by 6 in recent months. Booking Holdings Inc. (NASDAQ:BKNG) was in 96 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 98. Our calculations also showed that BKNG currently ranks 24th 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.

Stanley Druckenmiller of Duquesne 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. Keeping this in mind let’s view the recent hedge fund action regarding Booking Holdings Inc. (NASDAQ:BKNG).

How are hedge funds trading Booking Holdings Inc. (NASDAQ:BKNG)?

At second quarter’s end, a total of 96 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in BKNG over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

More specifically, Lone Pine Capital was the largest shareholder of Booking Holdings Inc. (NASDAQ:BKNG), with a stake worth $949.2 million reported as of the end of September. Trailing Lone Pine Capital was Melvin Capital Management, which amassed a stake valued at $714.5 million. PAR Capital Management, Citadel Investment Group, and Melvin Capital Management 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 PAR Capital Management allocated the biggest weight to Booking Holdings Inc. (NASDAQ:BKNG), around 19.34% of its 13F portfolio. RIT Capital Partners is also relatively very bullish on the stock, designating 10.98 percent of its 13F equity portfolio to BKNG.

Consequently, some big names were leading the bulls’ herd. Lone Pine Capital, founded by Stephen Mandel, created the largest position in Booking Holdings Inc. (NASDAQ:BKNG). Lone Pine Capital had $949.2 million invested in the company at the end of the quarter. Patrick Degorce’s Theleme Partners also initiated a $133.8 million position during the quarter. The other funds with brand new BKNG positions are OZ Management, Stanley Druckenmiller’s Duquesne Capital, and Robert Boucai’s Newbrook Capital Advisors.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Booking Holdings Inc. (NASDAQ:BKNG) but similarly valued. These stocks are Zoetis Inc (NYSE:ZTS), VMware, Inc. (NYSE:VMW), Automatic Data Processing (NASDAQ:ADP), Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Canadian National Railway Company (NYSE:CNI), Colgate-Palmolive Company (NYSE:CL), and China Petroleum & Chemical Corp (NYSE:SNP). This group of stocks’ market caps resemble BKNG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.9 hedge funds with bullish positions and the average amount invested in these stocks was $1430 million. That figure was $6099 million in BKNG’s case. Zoetis Inc (NYSE:ZTS) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (NYSE:SNP) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Booking Holdings Inc. (NASDAQ:BKNG) is more popular among hedge funds. Our overall hedge fund sentiment score for BKNG is 89.4. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Unfortunately BKNG wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on BKNG were disappointed as the stock returned 4.7% since the end of the second quarter (through 10/16) 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.