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#2 Stock Among Hedge Funds Beats The Market

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We at Insider Monkey have gone over 866 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. In this article, we look at what those funds think of Microsoft Corporation (NASDAQ:MSFT) based on that data.

Microsoft Corporation (NASDAQ:MSFT) was in 251 hedge funds' portfolios at the end of March. The all time high for this statistic is 258. MSFT investors should be aware of a decrease in support from the world's most elite money managers in recent months. There were 258 hedge funds in our database with MSFT holdings at the end of December. Our calculations also showed that MSFT ranked #2 among the 30 most popular stocks among hedge funds (click for Q1 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 115 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.

Chris Hohn's top 10 stock picks
Chris Hohn's top 10 stock picks

Chris Hohn of TCI Fund Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, advertising technology one of the fastest growing industries right now, so we are checking out stock pitches like this under-the-radar adtech stock that can deliver 10x gains. 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. With all of this in mind let's take a peek at the key hedge fund action surrounding Microsoft Corporation (NASDAQ:MSFT).

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

At Q1's end, a total of 251 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from one quarter earlier. By comparison, 235 hedge funds held shares or bullish call options in MSFT a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in Microsoft Corporation (NASDAQ:MSFT) was held by Fisher Asset Management, which reported holding $5656.1 million worth of stock at the end of December. It was followed by TCI Fund Management with a $4829.4 million position. Other investors bullish on the company included Tiger Global Management LLC, Fundsmith LLP, and Eagle Capital Management. In terms of the portfolio weights assigned to each position Lunia Capital allocated the biggest weight to Microsoft Corporation (NASDAQ:MSFT), around 29.99% of its 13F portfolio. Joho Capital is also relatively very bullish on the stock, dishing out 27.21 percent of its 13F equity portfolio to MSFT.

Since Microsoft Corporation (NASDAQ:MSFT) has witnessed a decline in interest from the smart money, we can see that there lies a certain "tier" of hedge funds that decided to sell off their entire stakes heading into Q2. Intriguingly, Gabriel Plotkin's Melvin Capital Management cut the biggest stake of the 750 funds followed by Insider Monkey, comprising close to $276.5 million in stock, and Karthik Sarma's SRS Investment Management was right behind this move, as the fund dropped about $212.4 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 7 funds heading into Q2.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Microsoft Corporation (NASDAQ:MSFT) but similarly valued. We will take a look at Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB), Tesla Inc. (NASDAQ:TSLA), Alibaba Group Holding Limited (NYSE:BABA), Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM), and Berkshire Hathaway Inc. (NYSE:BRK-B). All of these stocks' market caps match MSFT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AMZN,243,50421816,-30 GOOGL,185,24573668,6 FB,257,40967433,15 TSLA,62,10013166,-6 BABA,135,15497689,-21 TSM,76,10870661,4 BRK-B,111,19880791,1 Average,152.7,24603603,-4.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 152.7 hedge funds with bullish positions and the average amount invested in these stocks was $24604 million. That figure was $58965 million in MSFT's case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand Tesla Inc. (NASDAQ:TSLA) is the least popular one with only 62 bullish hedge fund positions. Microsoft Corporation (NASDAQ:MSFT) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MSFT is 98.7. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 17.2% in 2021 through June 11th and still beat the market by 3.3 percentage points. Hedge funds were also right about betting on MSFT as the stock returned 9.6% since the end of Q1 (through 6/11) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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