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How Did Snap Inc. (SNAP) Compare Against Hedge Fund Darlings in 2019?

Debasis Saha

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57% each. Hedge funds' top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by nearly 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Snap Inc. (NYSE:SNAP).

Is Snap Inc. (NYSE:SNAP) a healthy stock for your portfolio? The best stock pickers are betting on the stock. The number of bullish hedge fund bets went up by 7 recently. Our calculations also showed that SNAP 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). SNAP was in 52 hedge funds' portfolios at the end of September. There were 45 hedge funds in our database with SNAP positions at the end of the previous quarter.

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_364876" align="alignnone" width="896"] Eashwar Krishnan of Tybourne Capital Management[/caption]

Eashwar Krishnan - Tybourne Capital

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 let's take a look at the recent hedge fund action regarding Snap Inc. (NYSE:SNAP).

What have hedge funds been doing with Snap Inc. (NYSE:SNAP)?

At Q3's end, a total of 52 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 16% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SNAP over the last 17 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SNAP A Good Stock To Buy?

 

The largest stake in Snap Inc. (NYSE:SNAP) was held by Jericho Capital Asset Management, which reported holding $246.3 million worth of stock at the end of September. It was followed by Slate Path Capital with a $228.2 million position. Other investors bullish on the company included Tybourne Capital Management, Citadel Investment Group, and D E Shaw. In terms of the portfolio weights assigned to each position Slate Path Capital allocated the biggest weight to Snap Inc. (NYSE:SNAP), around 15.11% of its 13F portfolio. Jericho Capital Asset Management is also relatively very bullish on the stock, designating 14.06 percent of its 13F equity portfolio to SNAP.

Consequently, key hedge funds have jumped into Snap Inc. (NYSE:SNAP) headfirst. Coatue Management, managed by Philippe Laffont, assembled the most outsized position in Snap Inc. (NYSE:SNAP). Coatue Management had $166.1 million invested in the company at the end of the quarter. John Overdeck and David Siegel's Two Sigma Advisors also initiated a $87.3 million position during the quarter. The other funds with new positions in the stock are Lei Zhang's Hillhouse Capital Management, David Fiszel's Honeycomb Asset Management, and Seth Wunder's Black-and-White Capital.

Let's check out hedge fund activity in other stocks similar to Snap Inc. (NYSE:SNAP). We will take a look at Cerner Corporation (NASDAQ:CERN), CoStar Group Inc (NASDAQ:CSGP), Essex Property Trust Inc (NYSE:ESS), and TELUS Corporation (NYSE:TU). All of these stocks' market caps resemble SNAP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CERN,33,954875,4 CSGP,35,1384331,3 ESS,18,400479,-1 TU,17,301500,4 Average,25.75,760296,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.75 hedge funds with bullish positions and the average amount invested in these stocks was $760 million. That figure was $2118 million in SNAP's case. CoStar Group Inc (NASDAQ:CSGP) is the most popular stock in this table. On the other hand TELUS Corporation (NYSE:TU) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Snap Inc. (NYSE:SNAP) 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. Hedge funds were also right about betting on SNAP as the stock returned 181.1% so far in 2019 (through 12/23) 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. 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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