Were Hedge Funds Right About Electronic Arts (EA)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Electronic Arts Inc. (NASDAQ:EA)? The smart money sentiment can provide an answer to this question.

Electronic Arts Inc. (NASDAQ:EA) investors should be aware of a decrease in hedge fund sentiment in recent months. Electronic Arts Inc. (NASDAQ:EA) was in 50 hedge funds’ portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 79. There were 62 hedge funds in our database with EA holdings at the end of September. Our calculations also showed that EA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings).

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 124 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.

Gil Simon of SoMa Equity Partners

At Insider Monkey we leave no stone unturned when looking for 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 best hydrogen fuel cell 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. Keeping this in mind let’s review the fresh hedge fund action encompassing Electronic Arts Inc. (NASDAQ:EA).

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

At the end of December, a total of 50 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards EA over the last 22 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

The largest stake in Electronic Arts Inc. (NASDAQ:EA) was held by AQR Capital Management, which reported holding $168.1 million worth of stock at the end of December. It was followed by SoMa Equity Partners with a $129.2 million position. Other investors bullish on the company included GLG Partners, D E Shaw, and Renaissance Technologies. In terms of the portfolio weights assigned to each position SoMa Equity Partners allocated the biggest weight to Electronic Arts Inc. (NASDAQ:EA), around 3.13% of its 13F portfolio. Crescent Park Management is also relatively very bullish on the stock, designating 3.09 percent of its 13F equity portfolio to EA.

Because Electronic Arts Inc. (NASDAQ:EA) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there were a few hedge funds that decided to sell off their full holdings in the fourth quarter. At the top of the heap, Panayotis Takis Sparaggis’s Alkeon Capital Management dropped the biggest investment of the 750 funds followed by Insider Monkey, valued at an estimated $65.5 million in stock, and Steve Cohen’s Point72 Asset Management was right behind this move, as the fund dumped about $27.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 12 funds in the fourth quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Electronic Arts Inc. (NASDAQ:EA) but similarly valued. These stocks are National Grid plc (NYSE:NGG), Unity Software Inc. (NYSE:U), DocuSign, Inc. (NASDAQ:DOCU), Moderna, Inc. (NASDAQ:MRNA), American Electric Power Company, Inc. (NYSE:AEP), Veeva Systems Inc (NYSE:VEEV), and Exelon Corporation (NASDAQ:EXC). All of these stocks’ market caps match EA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.7 hedge funds with bullish positions and the average amount invested in these stocks was $2845 million. That figure was $1051 million in EA’s case. DocuSign, Inc. (NASDAQ:DOCU) is the most popular stock in this table. On the other hand National Grid plc (NYSE:NGG) is the least popular one with only 5 bullish hedge fund positions. Electronic Arts Inc. (NASDAQ:EA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for EA is 48.3. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and beat the market again by 1.6 percentage points. Unfortunately EA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on EA were disappointed as the stock returned -0.9% since the end of December (through 4/30) 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 many of these stocks already outperformed the market since 2019.

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