Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost more than 25%. Facebook, which was the second most popular stock, lost 20% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the first 2.5 months of 2019 and outperformed the broader market benchmark by 6.6 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Alteryx, Inc. (NYSE:AYX) ready to rally soon? The smart money is taking a bullish view. The number of long hedge fund positions improved by 3 lately. Overall hedge fund sentiment towards the stock is currently at its all time high. This is usually a very bullish indicator. For example hedge fund positions in Xerox jumped to its all time high by the end of December and the stock returned more than 72% in the following 3 months or so. Another example is Trade Desk Inc. Hedge fund sentiment towards the stock was also at its all time high at the beginning of this year and the stock returned more than 81% in 3.5 months. Similarly Xilinx and EEFT returned more than 40% after hedge fund sentiment hit its all time high at the end of December. We observed similar performances from OKTA, Twilio, CCK, MSCI, MASI and Progressive Corporation (PGR); these stocks returned 37%, 37%, 35%, 29%, 28% and 27% respectively. Hedge fund sentiment towards IQVIA Holdings Inc. (IQV), Brookfield Asset Management (BAM), Atlassian Corporation (TEAM), RCL, MTB, VAR, RNG, FIVE, ECA, SBNY, KL, MLNX and CRH also hit all time highs at the end of December, and all of these stocks returned more than 20% in the first 2.5-3.5 months of this year.
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 32 percentage points since May 2014 through March 12, 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.
Let's view the key hedge fund action encompassing Alteryx, Inc. (NYSE:AYX).
What have hedge funds been doing with Alteryx, Inc. (NYSE:AYX)?
At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from one quarter earlier. By comparison, 16 hedge funds held shares or bullish call options in AYX a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Alteryx, Inc. (NYSE:AYX) was held by Abdiel Capital Advisors, which reported holding $307.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $41.5 million position. Other investors bullish on the company included Polar Capital, Driehaus Capital, and Whale Rock Capital Management.
As one would reasonably expect, key hedge funds have been driving this bullishness. D E Shaw, managed by D. E. Shaw, initiated the most valuable position in Alteryx, Inc. (NYSE:AYX). D E Shaw had $7.2 million invested in the company at the end of the quarter. Nehal Chopra's Ratan Capital Group also initiated a $5.3 million position during the quarter. The following funds were also among the new AYX investors: Dmitry Balyasny's Balyasny Asset Management, Josh Goldberg's G2 Investment Partners Management, and Phill Gross and Robert Atchinson's Adage Capital Management.
Let's now review hedge fund activity in other stocks similar to Alteryx, Inc. (NYSE:AYX). We will take a look at Equity Commonwealth (NYSE:EQC), First Industrial Realty Trust, Inc. (NYSE:FR), Valvoline Inc. (NYSE:VVV), and Nexstar Media Group, Inc. (NASDAQ:NXST). All of these stocks' market caps match AYX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EQC,17,212173,0 FR,18,312949,2 VVV,18,344112,3 NXST,34,975256,-3 Average,21.75,461123,0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.75 hedge funds with bullish positions and the average amount invested in these stocks was $461 million. That figure was $526 million in AYX's case. Nexstar Media Group, Inc. (NASDAQ:NXST) is the most popular stock in this table. On the other hand Equity Commonwealth (NYSE:EQC) is the least popular one with only 17 bullish hedge fund positions. Alteryx, Inc. (NYSE:AYX) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on AYX as the stock returned 40.7% and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.