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Amazon.com, Inc. (AMZN): Were Hedge Funds Right About Going Nuts?

Asma UL Husna

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 Amazon.com, Inc. (NASDAQ:AMZN) heading into the second quarter and whether they were right about the stock.

Amazon.com, Inc. (NASDAQ:AMZN) shareholders have witnessed a gigantic increase in hedge fund interest lately. AMZN was in 251 hedge funds' portfolios at the end of the first quarter of 2020. There were 202 hedge funds in our database with AMZN positions at the end of 2019. Our calculations also showed that AMZN ranked #1 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.

[caption id="attachment_341263" align="aligncenter" width="392"] Eric Mandelblatt of Soroban Capital Partners[/caption]

Eric Mandelblatt Soroban Capital Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let's view the new hedge fund action surrounding Amazon.com, Inc. (NASDAQ:AMZN).

What have hedge funds been doing with Amazon.com, Inc. (NASDAQ:AMZN)?

At Q1's end, a total of 251 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AMZN over the last 18 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

More specifically, Citadel Investment Group was the largest shareholder of Amazon.com, Inc. (NASDAQ:AMZN), with a stake worth $5250.8 million reported as of the end of September. Trailing Citadel Investment Group was Fisher Asset Management, which amassed a stake valued at $3157.2 million. Eagle Capital Management, Viking Global, and Lone Pine Capital 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 VGI Partners allocated the biggest weight to Amazon.com, Inc. (NASDAQ:AMZN), around 21.2% of its 13F portfolio. Tairen Capital is also relatively very bullish on the stock, dishing out 20.58 percent of its 13F equity portfolio to AMZN.

Consequently, key money managers were leading the bulls' herd. Egerton Capital Limited, managed by John Armitage, assembled the largest position in Amazon.com, Inc. (NASDAQ:AMZN). Egerton Capital Limited had $840.9 million invested in the company at the end of the quarter. Eric W. Mandelblatt and Gaurav Kapadia's Soroban Capital Partners also made a $594.7 million investment in the stock during the quarter. The following funds were also among the new AMZN investors: Andrew Immerman and Jeremy Schiffman's Palestra Capital Management, Josh Donfeld and David Rogers's Castle Hook Partners, and Josh Resnick's Jericho Capital Asset Management.

Let's now review hedge fund activity in other stocks similar to Amazon.com, Inc. (NASDAQ:AMZN). We will take a look at Alphabet Inc (NASDAQ:GOOGL), Alphabet Inc (NASDAQ:GOOG), Alibaba Group Holding Limited (NYSE:BABA), and Facebook Inc (NASDAQ:FB). This group of stocks' market values match AMZN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GOOGL,167,11083440,4 GOOG,147,15254756,-1 BABA,167,19433098,-3 FB,213,19600111,15 Average,173.5,16342851,3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 173.5 hedge funds with bullish positions and the average amount invested in these stocks was $16343 million. That figure was $32864 million in AMZN's case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand Alphabet Inc (NASDAQ:GOOG) is the least popular one with only 147 bullish hedge fund positions. Compared to these stocks Amazon.com, Inc. (NASDAQ:AMZN) is more popular among hedge funds. 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 returned 13.3% in 2020 through June 25th but still managed to beat the market by 16.8 percentage points. Hedge funds were also right about betting on AMZN as the stock returned 41.3% so far in Q2 (through June 25th) 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.

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

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