Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. 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. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 31% through December 23rd. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.1% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. 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 Netflix, Inc. (NASDAQ:NFLX).
Is Netflix, Inc. (NASDAQ:NFLX) a buy right now? The best stock pickers are getting less bullish. The number of bullish hedge fund positions retreated by 11 in recent months. Our calculations also showed that NFLX currently ranks 14th 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).
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
[caption id="attachment_26082" align="alignnone" width="600"] Andreas Halvorsen of Viking Global[/caption]
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. With all of this in mind we're going to take a look at the latest hedge fund action surrounding Netflix, Inc. (NASDAQ:NFLX).
How have hedgies been trading Netflix, Inc. (NASDAQ:NFLX)?
Heading into the fourth quarter of 2019, a total of 95 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the previous quarter. On the other hand, there were a total of 84 hedge funds with a bullish position in NFLX a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Netflix, Inc. (NASDAQ:NFLX) was held by Viking Global, which reported holding $1160 million worth of stock at the end of September. It was followed by SRS Investment Management with a $1132.7 million position. Other investors bullish on the company included D1 Capital Partners, Lone Pine Capital, and Fisher Asset Management. In terms of the portfolio weights assigned to each position SRS Investment Management allocated the biggest weight to Netflix, Inc. (NASDAQ:NFLX), around 30.58% of its 13F portfolio. Teewinot Capital Advisers is also relatively very bullish on the stock, setting aside 16.39 percent of its 13F equity portfolio to NFLX.
Seeing as Netflix, Inc. (NASDAQ:NFLX) has witnessed falling interest from hedge fund managers, we can see that there is a sect of hedgies that slashed their full holdings heading into Q4. At the top of the heap, Aaron Cowen's Suvretta Capital Management dropped the largest position of all the hedgies monitored by Insider Monkey, worth an estimated $261.2 million in stock. Alex Sacerdote's fund, Whale Rock Capital Management, also sold off its stock, about $185 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 11 funds heading into Q4.
Let's now review hedge fund activity in other stocks similar to Netflix, Inc. (NASDAQ:NFLX). These stocks are AstraZeneca plc (NYSE:AZN), Thermo Fisher Scientific Inc. (NYSE:TMO), Royal Bank of Canada (NYSE:RY), and Amgen, Inc. (NASDAQ:AMGN). This group of stocks' market caps are closest to NFLX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AZN,25,1779111,1 TMO,65,3444543,-7 RY,17,491191,2 AMGN,48,2569750,6 Average,38.75,2071149,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 38.75 hedge funds with bullish positions and the average amount invested in these stocks was $2071 million. That figure was $8996 million in NFLX's case. Thermo Fisher Scientific Inc. (NYSE:TMO) is the most popular stock in this table. On the other hand Royal Bank of Canada (NYSE:RY) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Netflix, Inc. (NASDAQ:NFLX) 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. Unfortunately NFLX wasn't nearly as successful as these 20 stocks and hedge funds that were betting on NFLX were disappointed as the stock returned 24.4% so far in 2019 (through 12/23) and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 65 percent of these stocks already outperformed the market in 2019 Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.