Last year's fourth quarter was a rough one for investors and many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 41.1% in 2019 (through December 23) and outperformed the S&P 500 ETF by more than 10 percentage points. In this article we will study how hedge fund sentiment towards Alphabet Inc (NASDAQ:GOOGL) changed during the third quarter and how the stock performed in comparison to hedge fund consensus stocks.
Is Alphabet Inc (NASDAQ:GOOGL) a bargain? Prominent investors are becoming hopeful. The number of long hedge fund positions increased by 18 lately. Our calculations also showed that GOOGL ranked 5th among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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_758429" align="aligncenter" width="450"] Ric Dillon of Diamond Hill Capital[/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. Keeping this in mind we're going to view the fresh hedge fund action regarding Alphabet Inc (NASDAQ:GOOGL).
How are hedge funds trading Alphabet Inc (NASDAQ:GOOGL)?
Heading into the fourth quarter of 2019, a total of 147 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 14% from the previous quarter. On the other hand, there were a total of 137 hedge funds with a bullish position in GOOGL a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
The largest stake in Alphabet Inc (NASDAQ:GOOGL) was held by Fisher Asset Management, which reported holding $1794.3 million worth of stock at the end of September. It was followed by AQR Capital Management with a $952 million position. Other investors bullish on the company included Diamond Hill Capital, Citadel Investment Group, and Adage Capital Management. In terms of the portfolio weights assigned to each position Thunderbird Partners allocated the biggest weight to Alphabet Inc (NASDAQ:GOOGL), around 22.64% of its 13F portfolio. Brave Warrior Capital is also relatively very bullish on the stock, earmarking 19.14 percent of its 13F equity portfolio to GOOGL.
Now, some big names have been driving this bullishness. Windacre Partnership, managed by Snehal Amin, created the largest position in Alphabet Inc (NASDAQ:GOOGL). Windacre Partnership had $224.2 million invested in the company at the end of the quarter. Brandon Haley's Holocene Advisors also made a $107.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael Sidhom's Immersion Capital, James Crichton's Hitchwood Capital Management, and David Fiszel's Honeycomb Asset Management.
Let's go over hedge fund activity in other stocks similar to Alphabet Inc (NASDAQ:GOOGL). We will take a look at Alphabet Inc (NASDAQ:GOOG), Berkshire Hathaway Inc. (NYSE:BRK-B), Facebook Inc (NASDAQ:FB), and Alibaba Group Holding Limited (NYSE:BABA). This group of stocks' market values resemble GOOGL's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GOOG,136,15584517,10 BRK-B,99,22272006,6 FB,179,20837470,-3 BABA,149,19197070,22 Average,140.75,19472766,8.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 140.75 hedge funds with bullish positions and the average amount invested in these stocks was $19473 million. That figure was $12322 million in GOOGL's case. Facebook Inc (NASDAQ:FB) is the most popular stock in this table. On the other hand Berkshire Hathaway Inc. (NYSE:BRK-B) is the least popular one with only 99 bullish hedge fund positions. Alphabet Inc (NASDAQ:GOOGL) is not the most popular stock in this group but hedge fund interest is still above 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. Unfortunately GOOGL wasn't nearly as successful as these 20 stocks and hedge funds that were betting on GOOGL were disappointed as the stock returned 29.3% in 2019 (through December 23rd) and underperformed 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% of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.