Were Hedge Funds Right About Crowding Into Cloudflare, Inc. (NET)?

Keeping this in mind, let’s analyze whether Cloudflare, Inc. (NYSE:NET) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.

Cloudflare, Inc. (NYSE:NET) was in 36 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. NET investors should pay attention to an increase in hedge fund interest of late. There were 24 hedge funds in our database with NET holdings at the end of March. Our calculations also showed that NET 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.

In today’s marketplace there are a lot of signals shareholders put to use to evaluate stocks. A couple of the less utilized signals are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the best picks of the elite fund managers can beat their index-focused peers by a significant amount (see the details here).

Alex Sacerdote of Whale Rock Capital 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 let’s take a peek at the new hedge fund action encompassing Cloudflare, Inc. (NYSE:NET).

What does smart money think about Cloudflare, Inc. (NYSE:NET)?

Heading into the third quarter of 2020, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 50% from the previous quarter. By comparison, 0 hedge funds held shares or bullish call options in NET a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

Among these funds, Whale Rock Capital Management held the most valuable stake in Cloudflare, Inc. (NYSE:NET), which was worth $124.2 million at the end of the third quarter. On the second spot was Polar Capital which amassed $68.8 million worth of shares. ThornTree Capital Partners, Millennium Management, and Black-and-White Capital 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 ThornTree Capital Partners allocated the biggest weight to Cloudflare, Inc. (NYSE:NET), around 5.2% of its 13F portfolio. Whetstone Capital Advisors is also relatively very bullish on the stock, earmarking 3.48 percent of its 13F equity portfolio to NET.

Consequently, key money managers were breaking ground themselves. Engle Capital, managed by Jeffrey Hoffner, initiated the most valuable position in Cloudflare, Inc. (NYSE:NET). Engle Capital had $19.8 million invested in the company at the end of the quarter. Joel Ramin’s 12 West Capital Management also made a $12.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Anand Parekh’s Alyeska Investment Group, Dmitry Balyasny’s Balyasny Asset Management, and Noam Gottesman’s GLG Partners.

Let’s now take a look at hedge fund activity in other stocks similar to Cloudflare, Inc. (NYSE:NET). We will take a look at Horizon Therapeutics Public Limited Company (NASDAQ:HZNP), ABIOMED, Inc. (NASDAQ:ABMD), Pool Corporation (NASDAQ:POOL), KB Financial Group, Inc. (NYSE:KB), Alteryx, Inc. (NYSE:AYX), Gartner Inc (NYSE:IT), and Trimble Inc. (NASDAQ:TRMB). This group of stocks’ market caps match NET’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.9 hedge funds with bullish positions and the average amount invested in these stocks was $1172 million. That figure was $456 million in NET’s case. Alteryx, Inc. (NYSE:AYX) is the most popular stock in this table. On the other hand KB Financial Group, Inc. (NYSE:KB) is the least popular one with only 6 bullish hedge fund positions. Cloudflare, Inc. (NYSE:NET) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NET is 75.7. 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on NET as the stock returned 44.6% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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