Billionaire hedge fund managers such as David Abrams, Steve Cohen and Stan Druckenmiller can generate millions or even billions of dollars every year by pinning down high-potential small-cap stocks and pouring cash into these candidates. Small-cap stocks are overlooked by most investors, brokerage houses, and financial services hubs, while the nearly unlimited research abilities of the big players within the hedge fund industry can easily identify the undervalued and high-potential stocks that reside the ignored corners of equity markets. There are numerous small-cap stocks that have turned out to be great winners, which is one of the main reasons the Insider Monkey team pays close attention to the hedge fund activity in relation to these stocks.
Adobe Inc. (NASDAQ:ADBE) investors should pay attention to an increase in hedge fund interest lately. Overall hedge fund sentiment towards ADBE reached its all-time high. Our calculations also showed that ADBE ranked 15th among the 30 most popular stocks among hedge funds.
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 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 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 our short portfolio.
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 peek at the latest hedge fund action encompassing Adobe Inc. (NASDAQ:ADBE).
What have hedge funds been doing with Adobe Inc. (NASDAQ:ADBE)?
At the end of the second quarter, a total of 92 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from one quarter earlier. By comparison, 67 hedge funds held shares or bullish call options in ADBE a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
Among these funds, Lone Pine Capital held the most valuable stake in Adobe Inc. (NASDAQ:ADBE), which was worth $1103.2 million at the end of the second quarter. On the second spot was Fisher Asset Management which amassed $915.4 million worth of shares. Moreover, AQR Capital Management, Citadel Investment Group, and Egerton Capital Limited were also bullish on Adobe Inc. (NASDAQ:ADBE), allocating a large percentage of their portfolios to this stock.
As one would reasonably expect, some big names were breaking ground themselves. Steadfast Capital Management, managed by Robert Pitts, established the biggest position in Adobe Inc. (NASDAQ:ADBE). Steadfast Capital Management had $180.3 million invested in the company at the end of the quarter. Leon Shaulov's Maplelane Capital also initiated a $51.6 million position during the quarter. The other funds with brand new ADBE positions are Brandon Haley's Holocene Advisors, Yen Liow's Aravt Global, and Gregg Moskowitz's Interval Partners.
Let's also examine hedge fund activity in other stocks similar to Adobe Inc. (NASDAQ:ADBE). We will take a look at TOTAL S.A. (NYSE:TOT), BP plc (NYSE:BP), Paypal Holdings Inc (NASDAQ:PYPL), and NIKE, Inc. (NYSE:NKE). All of these stocks' market caps are similar to ADBE's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TOT,13,843743,0 BP,29,1246141,0 PYPL,95,3857093,2 NKE,51,1918137,-2 Average,47,1966279,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 47 hedge funds with bullish positions and the average amount invested in these stocks was $1966 million. That figure was $9205 million in ADBE's case. Paypal Holdings Inc (NASDAQ:PYPL) is the most popular stock in this table. On the other hand TOTAL S.A. (NYSE:TOT) is the least popular one with only 13 bullish hedge fund positions. Adobe Inc. (NASDAQ:ADBE) 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately ADBE wasn't nearly as successful as these 20 stocks and hedge funds that were betting on ADBE were disappointed as the stock returned -6.2% 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 so far this year.
Disclosure: None. This article was originally published at Insider Monkey.