Were Hedge Funds Right About Dumping Nikola Corporation (NKLA)?

In this article you are going to find out whether hedge funds think Nikola Corporation (NASDAQ:NKLA) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Nikola Corporation (NASDAQ:NKLA) an outstanding stock to buy now? The smart money was in a bearish mood. The number of long hedge fund positions decreased by 7 lately. Nikola Corporation (NASDAQ:NKLA) was in 12 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 29. Our calculations also showed that NKLA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 79 percentage points since March 2017 (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Matthew Hulsizer of PEAK6 Capital

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 are checking out stock pitches like this emerging lithium stock. 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. 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 homepage. Now let’s review the latest hedge fund action encompassing Nikola Corporation (NASDAQ:NKLA).

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

At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of -37% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards NKLA over the last 24 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Inclusive Capital held the most valuable stake in Nikola Corporation (NASDAQ:NKLA), which was worth $185.6 million at the end of the second quarter. On the second spot was Coatue Management which amassed $173.1 million worth of shares. Citadel Investment Group, Citadel Investment Group, and PEAK6 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 Inclusive Capital allocated the biggest weight to Nikola Corporation (NASDAQ:NKLA), around 17.19% of its 13F portfolio. Coatue Management is also relatively very bullish on the stock, designating 0.68 percent of its 13F equity portfolio to NKLA.

Seeing as Nikola Corporation (NASDAQ:NKLA) has faced a decline in interest from hedge fund managers, we can see that there was a specific group of fund managers who sold off their full holdings heading into Q3. Intriguingly, David Greenspan’s Slate Path Capital dropped the biggest stake of all the hedgies monitored by Insider Monkey, totaling an estimated $4.7 million in stock. Kenneth Tropin’s fund, Graham Capital Management, also dropped its stock, about $1.8 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 7 funds heading into Q3.

Let’s now take a look at hedge fund activity in other stocks similar to Nikola Corporation (NASDAQ:NKLA). We will take a look at Toll Brothers Inc (NYSE:TOL), Cullen/Frost Bankers, Inc. (NYSE:CFR), Axalta Coating Systems Ltd (NYSE:AXTA), Digital Turbine Inc (NASDAQ:APPS), Ascendis Pharma A/S (NASDAQ:ASND), Brooks Automation, Inc. (NASDAQ:BRKS), and Freshpet Inc (NASDAQ:FRPT). All of these stocks’ market caps are similar to NKLA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $817 million. That figure was $389 million in NKLA’s case. Axalta Coating Systems Ltd (NYSE:AXTA) is the most popular stock in this table. On the other hand Cullen/Frost Bankers, Inc. (NYSE:CFR) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Nikola Corporation (NASDAQ:NKLA) is even less popular than CFR. Our overall hedge fund sentiment score for NKLA is 10.4. 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. Hedge funds dodged a bullet by taking a bearish stance towards NKLA. Our calculations showed that the top 5 most popular hedge fund stocks 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 through November 5th but managed to beat the market again by 3.1 percentage points. Unfortunately NKLA wasn’t nearly as popular as these 5 stocks (hedge fund sentiment was very bearish); NKLA investors were disappointed as the stock returned -27.2% since the end of the second quarter (through 11/5) 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 most of these stocks already outperformed the market since 2019.

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

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