U.S. Markets closed

2019 Review: Top Hedge Fund Stocks vs. Zynga Inc (ZNGA)

Debasis Saha

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 31% in 2019 (through December 23rd). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Zynga Inc (NASDAQ:ZNGA).

Zynga Inc (NASDAQ:ZNGA) has seen a decrease in hedge fund sentiment lately. ZNGA was in 39 hedge funds' portfolios at the end of the third quarter of 2019. There were 48 hedge funds in our database with ZNGA positions at the end of the previous quarter. Our calculations also showed that ZNGA isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_258236" align="alignnone" width="600"] Ken Griffin of Citadel Investment Group[/caption]

Ken Griffin

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Now we're going to analyze the fresh hedge fund action surrounding Zynga Inc (NASDAQ:ZNGA).

What have hedge funds been doing with Zynga Inc (NASDAQ:ZNGA)?

At the end of the third quarter, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ZNGA over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ZNGA A Good Stock To Buy?

More specifically, Cadian Capital was the largest shareholder of Zynga Inc (NASDAQ:ZNGA), with a stake worth $165.8 million reported as of the end of September. Trailing Cadian Capital was Citadel Investment Group, which amassed a stake valued at $153.9 million. Iridian Asset Management, Renaissance Technologies, and D E Shaw 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 Greenvale Capital allocated the biggest weight to Zynga Inc (NASDAQ:ZNGA), around 14.37% of its 13F portfolio. Tiger Legatus Capital is also relatively very bullish on the stock, setting aside 13.26 percent of its 13F equity portfolio to ZNGA.

Judging by the fact that Zynga Inc (NASDAQ:ZNGA) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain "tier" of money managers that slashed their entire stakes by the end of the third quarter. Intriguingly, Seth Wunder's Black-and-White Capital dumped the biggest position of the "upper crust" of funds followed by Insider Monkey, totaling an estimated $49 million in stock. James Parsons's fund, Junto Capital Management, also said goodbye to its stock, about $31.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 9 funds by the end of the third quarter.

Let's now review hedge fund activity in other stocks similar to Zynga Inc (NASDAQ:ZNGA). We will take a look at Jabil Inc. (NYSE:JBL), BWX Technologies Inc (NYSE:BWXT), Ingredion Inc (NYSE:INGR), and Cloudflare, Inc. (NYSE:NET). This group of stocks' market values are similar to ZNGA's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JBL,30,437935,4 BWXT,21,58972,2 INGR,27,343195,6 NET,33,144754,33 Average,27.75,246214,11.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.75 hedge funds with bullish positions and the average amount invested in these stocks was $246 million. That figure was $1138 million in ZNGA's case. Cloudflare, Inc. (NYSE:NET) is the most popular stock in this table. On the other hand BWX Technologies Inc (NYSE:BWXT) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Zynga Inc (NASDAQ:ZNGA) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on ZNGA as the stock returned 59.8% so far in 2019 (through 12/23) 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. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

Related Content