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).
Is Zillow Group Inc (NASDAQ:Z) a good investment now? Prominent investors were in an optimistic mood. The number of bullish hedge fund positions moved up by 22 recently. Zillow Group Inc (NASDAQ:Z) was in 59 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 51. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that Z 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.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.
Steven Cohen of Point72 Asset Management
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. With all of this in mind let’s view the key hedge fund action encompassing Zillow Group Inc (NASDAQ:Z).
What does smart money think about Zillow Group Inc (NASDAQ:Z)?
At second quarter’s end, a total of 59 of the hedge funds tracked by Insider Monkey were long this stock, a change of 59% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in Z over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were upping their holdings significantly (or already accumulated large positions).
The largest stake in Zillow Group Inc (NASDAQ:Z) was held by SRS Investment Management, which reported holding $565.2 million worth of stock at the end of September. It was followed by Jericho Capital Asset Management with a $155.5 million position. Other investors bullish on the company included Citadel Investment Group, Matrix Capital Management, and Zevenbergen Capital Investments. In terms of the portfolio weights assigned to each position Thrive Capital allocated the biggest weight to Zillow Group Inc (NASDAQ:Z), around 92.43% of its 13F portfolio. Ancient Art (Teton Capital) is also relatively very bullish on the stock, earmarking 14.76 percent of its 13F equity portfolio to Z.
As industrywide interest jumped, key money managers have been driving this bullishness. Jericho Capital Asset Management, managed by Josh Resnick, assembled the most valuable position in Zillow Group Inc (NASDAQ:Z). Jericho Capital Asset Management had $155.5 million invested in the company at the end of the quarter. Alexander Mitchell’s Scopus Asset Management also made a $54.7 million investment in the stock during the quarter. The following funds were also among the new Z investors: Steve Cohen’s Point72 Asset Management, Renaissance Technologies, and Paul Marshall and Ian Wace’s Marshall Wace LLP.
Let’s check out hedge fund activity in other stocks similar to Zillow Group Inc (NASDAQ:Z). We will take a look at Markel Corporation (NYSE:MKL), SK Telecom Co., Ltd. (NYSE:SKM), Insulet Corporation (NASDAQ:PODD), J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), Expeditors International of Washington (NASDAQ:EXPD), Qorvo Inc (NASDAQ:QRVO), and Etsy Inc (NASDAQ:ETSY). This group of stocks’ market values are similar to Z’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| MKL | 33 | 943795 | 1 |
| SKM | 8 | 129598 | 3 |
| PODD | 44 | 985462 | 8 |
| JBHT | 24 | 215950 | -1 |
| EXPD | 33 | 443457 | 2 |
| QRVO | 51 | 1608774 | 12 |
| ETSY | 43 | 1727421 | 5 |
| Average | 33.7 | 864922 | 4.3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.7 hedge funds with bullish positions and the average amount invested in these stocks was $865 million. That figure was $2300 million in Z’s case. Qorvo Inc (NASDAQ:QRVO) is the most popular stock in this table. On the other hand SK Telecom Co., Ltd. (NYSE:SKM) is the least popular one with only 8 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 90. 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 returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on Z as the stock returned 68.6% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
