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2019 Review: Top Hedge Fund Stocks vs. Pinduoduo Inc. (PDD)

Debasis Saha

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about Pinduoduo Inc. (NASDAQ:PDD)?

Pinduoduo Inc. (NASDAQ:PDD) shareholders have witnessed an increase in support from the world's most elite money managers in recent months. PDD was in 30 hedge funds' portfolios at the end of the third quarter of 2019. There were 29 hedge funds in our database with PDD positions at the end of the previous quarter. Our calculations also showed that PDD 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).

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 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 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.

[caption id="attachment_337892" align="alignnone" width="2480"] Lei Zhang of Hillhouse Capital Management[/caption]

Lei Zhang Hillhouse Capital

We leave no stone unturned when looking for the next great investment idea. For example 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. 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 is still extremely cheap despite already gaining 20 percent. With all of this in mind we're going to take a look at the recent hedge fund action surrounding Pinduoduo Inc. (NASDAQ:PDD).

How are hedge funds trading Pinduoduo Inc. (NASDAQ:PDD)?

At Q3's end, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from the previous quarter. By comparison, 21 hedge funds held shares or bullish call options in PDD a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is PDD A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Lei Zhang's Hillhouse Capital Management has the biggest position in Pinduoduo Inc. (NASDAQ:PDD), worth close to $359.1 million, amounting to 4.9% of its total 13F portfolio. The second largest stake is held by Altimeter Capital Management, led by Brad Gerstner, holding a $280 million position; 6.8% of its 13F portfolio is allocated to the stock. Some other peers that are bullish contain  Karthik Sarma's SRS Investment Management and Daniel Patrick Gibson's Sylebra Capital Management. In terms of the portfolio weights assigned to each position EastBay Asset Management allocated the biggest weight to Pinduoduo Inc. (NASDAQ:PDD), around 8.53% of its 13F portfolio. Altimeter Capital Management is also relatively very bullish on the stock, setting aside 6.83 percent of its 13F equity portfolio to PDD.

Consequently, key money managers have jumped into Pinduoduo Inc. (NASDAQ:PDD) headfirst. North Peak Capital, managed by Michael Kahan and Jeremy Kahan, established the most outsized position in Pinduoduo Inc. (NASDAQ:PDD). North Peak Capital had $15.2 million invested in the company at the end of the quarter. Philippe Laffont's Coatue Management also initiated a $8.6 million position during the quarter. The other funds with brand new PDD positions are Matthew Hulsizer's PEAK6 Capital Management, John Overdeck and David Siegel's Two Sigma Advisors, and David E. Shaw's D E Shaw.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Pinduoduo Inc. (NASDAQ:PDD) but similarly valued. We will take a look at Delta Air Lines, Inc. (NYSE:DAL), Roper Industries, Inc. (NYSE:ROP), China Telecom Corporation Limited (NYSE:CHA), and Welltower Inc. (NYSE:WELL). This group of stocks' market caps are closest to PDD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DAL,65,6996617,-5 ROP,37,1044629,2 CHA,8,24410,1 WELL,15,364970,-2 Average,31.25,2107657,-1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.25 hedge funds with bullish positions and the average amount invested in these stocks was $2108 million. That figure was $1435 million in PDD's case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 8 bullish hedge fund positions. Pinduoduo Inc. (NASDAQ:PDD) is not the least popular stock in this group but hedge fund interest is still below average. 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. A small number of hedge funds were also right about betting on PDD as the stock returned 68.9% in 2019 through December 23rd and outperformed the market by an even larger margin. 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.

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