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How Did Shopify Inc (SHOP) Compare Against Top Hedge Fund Stocks in 2019?

Debasis Saha

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Shopify Inc (NYSE:SHOP) and see how the stock performed in comparison to hedge funds' consensus picks.

Is Shopify Inc (NYSE:SHOP) a bargain? Prominent investors are becoming hopeful. The number of bullish hedge fund bets increased by 8 recently. Our calculations also showed that SHOP 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).

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 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. 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_29562" align="alignnone" width="600"] Stephen Mandel of Lone Pine Capital[/caption]

Lone Pine Capital 2015 Q2 Investor Letter

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. Keeping this in mind we're going to take a glance at the key hedge fund action surrounding Shopify Inc (NYSE:SHOP).

What have hedge funds been doing with Shopify Inc (NYSE:SHOP)?

Heading into the fourth quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 31% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in SHOP over the last 17 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SHOP A Good Stock To Buy?

More specifically, Lone Pine Capital was the largest shareholder of Shopify Inc (NYSE:SHOP), with a stake worth $429.2 million reported as of the end of September. Trailing Lone Pine Capital was Abdiel Capital Advisors, which amassed a stake valued at $362.5 million. Two Sigma Advisors, SCGE Management, and Whale Rock Capital Management 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 Strategy Capital allocated the biggest weight to Shopify Inc (NYSE:SHOP), around 26.81% of its 13F portfolio. Abdiel Capital Advisors is also relatively very bullish on the stock, earmarking 22.26 percent of its 13F equity portfolio to SHOP.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls' herd. Alkeon Capital Management, managed by Panayotis Takis Sparaggis, assembled the most valuable position in Shopify Inc (NYSE:SHOP). Alkeon Capital Management had $134 million invested in the company at the end of the quarter. Stanley Druckenmiller's Duquesne Capital also initiated a $66.2 million position during the quarter. The following funds were also among the new SHOP investors: Panayotis Takis Sparaggis's Alkeon Capital Management, Matthew Hulsizer's PEAK6 Capital Management, and Jeffrey Talpins's Element Capital Management.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Shopify Inc (NYSE:SHOP) but similarly valued. We will take a look at Equity Residential (NYSE:EQR), Advanced Micro Devices, Inc. (NASDAQ:AMD), Twitter Inc (NYSE:TWTR), and Barclays PLC (NYSE:BCS). This group of stocks' market caps resemble SHOP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EQR,23,196497,0 AMD,56,1135132,15 TWTR,50,2252822,3 BCS,15,131768,3 Average,36,929055,5.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36 hedge funds with bullish positions and the average amount invested in these stocks was $929 million. That figure was $2510 million in SHOP's case. Advanced Micro Devices, Inc. (NASDAQ:AMD) is the most popular stock in this table. On the other hand Barclays PLC (NYSE:BCS) is the least popular one with only 15 bullish hedge fund positions. Shopify Inc (NYSE:SHOP) 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 SHOP as the stock returned 181.1% 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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