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Hedge Fund Consensus Stocks vs. Roku, Inc. (ROKU) In 2019

Reymerlyn Martin

Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before 2018's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Roku, Inc. (NASDAQ:ROKU) changed recently.

Is Roku, Inc. (NASDAQ:ROKU) a splendid investment right now? Money managers are getting more optimistic. The number of long hedge fund bets went up by 4 recently. Our calculations also showed that ROKU 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). ROKU was in 37 hedge funds' portfolios at the end of September. There were 33 hedge funds in our database with ROKU 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_746893" align="aligncenter" width="1613"] Paul Marshall of Marshall Wace[/caption]

Paul Marshall Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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 is still extremely cheap despite already gaining 20 percent. Now let's take a gander at the fresh hedge fund action encompassing Roku, Inc. (NASDAQ:ROKU).

What have hedge funds been doing with Roku, Inc. (NASDAQ:ROKU)?

At the end of the third quarter, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from the second quarter of 2019. On the other hand, there were a total of 31 hedge funds with a bullish position in ROKU a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Whale Rock Capital Management was the largest shareholder of Roku, Inc. (NASDAQ:ROKU), with a stake worth $123.1 million reported as of the end of September. Trailing Whale Rock Capital Management was Citadel Investment Group, which amassed a stake valued at $32 million. D E Shaw, Ogborne Capital, and Two Sigma Advisors 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 Ogborne Capital allocated the biggest weight to Roku, Inc. (NASDAQ:ROKU), around 14.53% of its 13F portfolio. Empirical Capital Partners is also relatively very bullish on the stock, designating 8.06 percent of its 13F equity portfolio to ROKU.

As one would reasonably expect, key money managers were breaking ground themselves. Two Sigma Advisors, managed by John Overdeck and David Siegel, created the largest position in Roku, Inc. (NASDAQ:ROKU). Two Sigma Advisors had $18 million invested in the company at the end of the quarter. Seth Wunder's Black-and-White Capital also made a $10.2 million investment in the stock during the quarter. The other funds with brand new ROKU positions are Paul Marshall and Ian Wace's Marshall Wace, Cristan Blackman's Empirical Capital Partners, and Benjamin A. Smith's Laurion Capital Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Roku, Inc. (NASDAQ:ROKU) but similarly valued. We will take a look at J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), Advance Auto Parts, Inc. (NYSE:AAP), Okta, Inc. (NASDAQ:OKTA), and Godaddy Inc (NYSE:GDDY). All of these stocks' market caps resemble ROKU's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JBHT,22,347136,2 AAP,36,1497113,-1 OKTA,49,1120794,10 GDDY,48,2545499,4 Average,38.75,1377636,3.75 [/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 $1378 million. That figure was $322 million in ROKU's case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) is the least popular one with only 22 bullish hedge fund positions. Roku, Inc. (NASDAQ:ROKU) 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 41.3% in 2019 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 ROKU as the stock returned 337% in 2019 and outclassed 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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