U.S. Markets closed

Here is Hedge Funds’ 25th Most Popular Stock Pick

Reymerlyn Martin

Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees during the first half of 2019 amid Powell's pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the second quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards ServiceNow Inc (NYSE:NOW).

ServiceNow Inc (NYSE:NOW) has experienced an increase in hedge fund interest of late. Overall hedge fund sentiment towards the stock is at its all time high. Our calculations also showed that NOW ranked 25th among the 30 most popular stocks among hedge funds.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (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 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

COATUE MANAGEMENT

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a gander at the recent hedge fund action surrounding ServiceNow Inc (NYSE:NOW).

How are hedge funds trading ServiceNow Inc (NYSE:NOW)?

At Q2's end, a total of 77 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 18% from the first quarter of 2019. On the other hand, there were a total of 46 hedge funds with a bullish position in NOW a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

NOW_oct2019

The largest stake in ServiceNow Inc (NYSE:NOW) was held by Coatue Management, which reported holding $753.3 million worth of stock at the end of March. It was followed by Melvin Capital Management with a $376.3 million position. Other investors bullish on the company included Lone Pine Capital, Alkeon Capital Management, and Tiger Global Management LLC.

As one would reasonably expect, key hedge funds were leading the bulls' herd. Renaissance Technologies, managed by Jim Simons, created the most valuable position in ServiceNow Inc (NYSE:NOW). Renaissance Technologies had $69.7 million invested in the company at the end of the quarter. David Fiszel's Honeycomb Asset Management also made a $41.2 million investment in the stock during the quarter. The other funds with brand new NOW positions are Gregg Moskowitz's Interval Partners, Joe DiMenna's ZWEIG DIMENNA PARTNERS, and Benjamin A. Smith's Laurion Capital Management.

Let's now take a look at hedge fund activity in other stocks similar to ServiceNow Inc (NYSE:NOW). We will take a look at Norfolk Southern Corp. (NYSE:NSC), General Dynamics Corporation (NYSE:GD), Deere & Company (NYSE:DE), and Marsh & McLennan Companies, Inc. (NYSE:MMC). This group of stocks' market valuations are similar to NOW's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NSC,54,2126444,7 GD,40,7211925,-2 DE,40,1582854,9 MMC,29,741920,0 Average,40.75,2915786,3.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 40.75 hedge funds with bullish positions and the average amount invested in these stocks was $2916 million. That figure was $4251 million in NOW's case. Norfolk Southern Corp. (NYSE:NSC) is the most popular stock in this table. On the other hand Marsh & McLennan Companies, Inc. (NYSE:MMC) is the least popular one with only 29 bullish hedge fund positions. Compared to these stocks ServiceNow Inc (NYSE:NOW) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately NOW wasn't nearly as popular as these 20 stocks and hedge funds that were betting on NOW were disappointed as the stock returned -7.5% during the third quarter 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 in Q3.

Disclosure: None. This article was originally published at Insider Monkey.

Related Content