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Hedge Fund Favorites vs. Cloudflare, Inc. (NET) 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 Cloudflare, Inc. (NYSE:NET).

Is Cloudflare, Inc. (NYSE:NET) a buy right now? Investors who are in the know are taking a bullish view. The number of bullish hedge fund positions went up by 33 lately. Our calculations also showed that NET 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).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_26082" align="alignnone" width="600"] Andreas Halvorsen of Viking Global[/caption]

Andreas Halvorsen

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. Now we're going to review the recent hedge fund action regarding Cloudflare, Inc. (NYSE:NET).

How have hedgies been trading Cloudflare, Inc. (NYSE:NET)?

At Q3's end, a total of 33 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 33 from one quarter earlier. The graph below displays the number of hedge funds with bullish position in NET 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 NET A Good Stock To Buy?

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Andreas Halvorsen's Viking Global has the most valuable position in Cloudflare, Inc. (NYSE:NET), worth close to $27 million, corresponding to 0.1% of its total 13F portfolio. Coming in second is Strycker View Capital, led by Usman Waheed, holding a $17.1 million position; the fund has 6.8% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism encompass Ross Turner's Pelham Capital, David Kowitz and Sheldon Kasowitz's Indus Capital and Jeffrey Talpins's Element Capital Management. In terms of the portfolio weights assigned to each position Strycker View Capital allocated the biggest weight to Cloudflare, Inc. (NYSE:NET), around 6.78% of its 13F portfolio. Pelham Capital is also relatively very bullish on the stock, designating 1.56 percent of its 13F equity portfolio to NET.

As industrywide interest jumped, key hedge funds were breaking ground themselves. Viking Global, managed by Andreas Halvorsen, initiated the most outsized position in Cloudflare, Inc. (NYSE:NET). Viking Global had $27 million invested in the company at the end of the quarter. Usman Waheed's Strycker View Capital also made a $17.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Ross Turner's Pelham Capital, David Kowitz and Sheldon Kasowitz's Indus Capital, and Jeffrey Talpins's Element Capital Management.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Cloudflare, Inc. (NYSE:NET) but similarly valued. These stocks are Suzano S.A. (NYSE:SUZ), Amarin Corporation plc (NASDAQ:AMRN), Grupo Aeroportuario del Pacifico (NYSE:PAC), and L Brands Inc (NYSE:LB). All of these stocks' market caps match NET's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SUZ,4,36039,2 AMRN,29,1392510,-4 PAC,3,93322,-1 LB,36,542095,6 Average,18,515992,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $516 million. That figure was $145 million in NET's case. L Brands Inc (NYSE:LB) is the most popular stock in this table. On the other hand Grupo Aeroportuario del Pacifico (NYSE:PAC) is the least popular one with only 3 bullish hedge fund positions. Cloudflare, Inc. (NYSE:NET) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. 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 NET wasn't nearly as popular as these 20 stocks and hedge funds that were betting on NET were disappointed as the stock returned -3.7% 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 many of these stocks already outperformed the market so far this year. 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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