Were Hedge Funds Right About Piling Into Tesla Inc. (TSLA)?

We at Insider Monkey have gone over 821 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Tesla Inc. (NASDAQ:TSLA) and determine whether the smart money was really smart about this stock.

Tesla Inc. (NASDAQ:TSLA) shareholders have witnessed an increase in enthusiasm from smart money of late. Our calculations also showed that TSLA isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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. 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.

Donald Sussman of Paloma Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a look at the key hedge fund action encompassing Tesla Inc. (NASDAQ:TSLA).

Hedge fund activity in Tesla Inc. (NASDAQ:TSLA)

At Q1’s end, a total of 61 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in TSLA over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the biggest position in Tesla Inc. (NASDAQ:TSLA). Citadel Investment Group has a $3.8397 billion call position in the stock, comprising 1.7% of its 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, which holds a $402.2 million position; 0.4% of its 13F portfolio is allocated to the stock. Some other hedge funds and institutional investors that are bullish consist of Alex Sacerdote’s Whale Rock Capital Management, Philippe Laffont’s Coatue Management and Anand Desai’s Darsana Capital Partners. In terms of the portfolio weights assigned to each position Tao Capital allocated the biggest weight to Tesla Inc. (NASDAQ:TSLA), around 25.09% of its 13F portfolio. Darsana Capital Partners is also relatively very bullish on the stock, dishing out 12.39 percent of its 13F equity portfolio to TSLA.

Consequently, specific money managers have jumped into Tesla Inc. (NASDAQ:TSLA) headfirst. Coatue Management, managed by Philippe Laffont, created the most valuable position in Tesla Inc. (NASDAQ:TSLA). Coatue Management had $280.2 million invested in the company at the end of the quarter. Anand Desai’s Darsana Capital Partners also initiated a $262 million position during the quarter. The other funds with new positions in the stock are John Overdeck and David Siegel’s Two Sigma Advisors, Lei Zhang’s Hillhouse Capital Management, and Donald Sussman’s Paloma Partners.

Let’s also examine hedge fund activity in other stocks similar to Tesla Inc. (NASDAQ:TSLA). We will take a look at Danaher Corporation (NYSE:DHR), American Tower Corporation (NYSE:AMT), TOTAL S.A. (NYSE:TOT), and Lockheed Martin Corporation (NYSE:LMT). This group of stocks’ market caps match TSLA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 46.75 hedge funds with bullish positions and the average amount invested in these stocks was $2339 million. That figure was $2125 million in TSLA’s case. Danaher Corporation (NYSE:DHR) is the most popular stock in this table. On the other hand TOTAL S.A. (NYSE:TOT) is the least popular one with only 12 bullish hedge fund positions. Tesla Inc. (NASDAQ:TSLA) is not the most popular stock in this group but hedge fund interest is still above average. 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 13.3% in 2020 through June 25th but still beat the market by 16.8 percentage points. Hedge funds were also right about betting on TSLA as the stock returned 88.2% in Q2 (through June 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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