Is Cloudflare, Inc. (NET) A Good Stock To Buy?
Last year we predicted the arrival of the first US recession since 2009 and we told in advance that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Cloudflare, Inc. (NYSE:NET).
Is NET a good stock to buy? Cloudflare, Inc. (NYSE:NET) has experienced a decrease in hedge fund sentiment lately. Cloudflare, Inc. (NYSE:NET) was in 45 hedge funds' portfolios at the end of March. The all time high for this statistic is 60. There were 60 hedge funds in our database with NET holdings at the end of December. Our calculations also showed that NET isn't 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.
David E. Shaw of D.E. Shaw
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation, which is why we are checking out this inflation play. We go through lists like 10 best gold stocks to buy to identify promising stocks. 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 we're going to take a look at the latest hedge fund action surrounding Cloudflare, Inc. (NYSE:NET).
Do Hedge Funds Think NET Is A Good Stock To Buy Now?
At the end of March, a total of 45 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the fourth quarter of 2020. By comparison, 24 hedge funds held shares or bullish call options in NET a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were upping their stakes substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Alkeon Capital Management, managed by Panayotis Takis Sparaggis, holds the most valuable position in Cloudflare, Inc. (NYSE:NET). Alkeon Capital Management has a $117.6 million position in the stock, comprising 0.2% of its 13F portfolio. Sitting at the No. 2 spot is Citadel Investment Group, led by Ken Griffin, holding a $70 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining peers that are bullish encompass Catherine D. Wood's ARK Investment Management, and D. E. Shaw's D E Shaw. In terms of the portfolio weights assigned to each position SW Investment Management allocated the biggest weight to Cloudflare, Inc. (NYSE:NET), around 18.1% of its 13F portfolio. Whetstone Capital Advisors is also relatively very bullish on the stock, designating 7.68 percent of its 13F equity portfolio to NET.
Seeing as Cloudflare, Inc. (NYSE:NET) has experienced declining sentiment from the entirety of the hedge funds we track, it's easy to see that there lies a certain "tier" of fund managers that slashed their positions entirely in the first quarter. It's worth mentioning that Michael Pausic's Foxhaven Asset Management cut the biggest stake of the 750 funds monitored by Insider Monkey, worth an estimated $57.4 million in stock. Brandon Haley's fund, Holocene Advisors, also dropped its stock, about $46.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 15 funds in the first quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Cloudflare, Inc. (NYSE:NET) but similarly valued. These stocks are Fresenius Medical Care AG & Co. (NYSE:FMS), CarMax Inc (NYSE:KMX), Kellogg Company (NYSE:K), Futu Holdings Limited (NASDAQ:FUTU), Genmab A/S (NASDAQ:GMAB), Church & Dwight Co., Inc. (NYSE:CHD), and International Paper Company (NYSE:IP). This group of stocks' market values are closest to NET's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FMS,12,10933,3 KMX,46,2030896,0 K,32,557204,-5 FUTU,26,1014997,9 GMAB,13,113947,-3 CHD,27,1136541,-11 IP,36,259964,5 Average,27.4,732069,-0.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27.4 hedge funds with bullish positions and the average amount invested in these stocks was $732 million. That figure was $792 million in NET's case. CarMax Inc (NYSE:KMX) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. (NYSE:FMS) is the least popular one with only 12 bullish hedge fund positions. Cloudflare, Inc. (NYSE:NET) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NET is 61. 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 17.4% in 2021 through June 18th and still beat the market by 6.1 percentage points. Hedge funds were also right about betting on NET as the stock returned 44.7% since the end of Q1 (through 6/18) 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.
