It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Etsy Inc (NASDAQ:ETSY).
Etsy Inc (NASDAQ:ETSY) was in 46 hedge funds' portfolios at the end of the third quarter of 2019. ETSY investors should be aware of an increase in hedge fund sentiment recently. There were 41 hedge funds in our database with ETSY positions at the end of the previous quarter. Our calculations also showed that ETSY isn't 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 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 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 stocks that are in our short portfolio.
[caption id="attachment_42144" align="aligncenter" width="239"] Roberto Mignone of Bridger Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to review the new hedge fund action encompassing Etsy Inc (NASDAQ:ETSY).
How are hedge funds trading Etsy Inc (NASDAQ:ETSY)?
At Q3's end, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ETSY over the last 17 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Renaissance Technologies has the number one position in Etsy Inc (NASDAQ:ETSY), worth close to $410.6 million, comprising 0.3% of its total 13F portfolio. The second most bullish fund manager is D E Shaw, managed by David E. Shaw, which holds a $142.6 million position; 0.2% of its 13F portfolio is allocated to the stock. Some other professional money managers that hold long positions comprise Gabriel Plotkin's Melvin Capital Management, John Overdeck and David Siegel's Two Sigma Advisors and Josh Resnick's Jericho Capital Asset Management. In terms of the portfolio weights assigned to each position Half Sky Capital allocated the biggest weight to Etsy Inc (NASDAQ:ETSY), around 39.39% of its portfolio. ThornTree Capital Partners is also relatively very bullish on the stock, setting aside 10.21 percent of its 13F equity portfolio to ETSY.
As one would reasonably expect, key hedge funds have jumped into Etsy Inc (NASDAQ:ETSY) headfirst. Jericho Capital Asset Management, managed by Josh Resnick, assembled the largest position in Etsy Inc (NASDAQ:ETSY). Jericho Capital Asset Management had $66.5 million invested in the company at the end of the quarter. Eashwar Krishnan's Tybourne Capital Management also initiated a $44.7 million position during the quarter. The following funds were also among the new ETSY investors: Roberto Mignone's Bridger Management, Gabriel Plotkin's Melvin Capital Management, and Philippe Laffont's Coatue Management.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Etsy Inc (NASDAQ:ETSY) but similarly valued. We will take a look at Woodward Inc (NASDAQ:WWD), Commerce Bancshares, Inc. (NASDAQ:CBSH), Chemed Corporation (NYSE:CHE), and Donaldson Company, Inc. (NYSE:DCI). This group of stocks' market values are similar to ETSY's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WWD,23,340865,-5 CBSH,9,29611,-2 CHE,20,388232,-1 DCI,21,199801,5 Average,18.25,239627,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $240 million. That figure was $1224 million in ETSY's case. Woodward Inc (NASDAQ:WWD) is the most popular stock in this table. On the other hand Commerce Bancshares, Inc. (NASDAQ:CBSH) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Etsy Inc (NASDAQ:ETSY) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately ETSY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ETSY were disappointed as the stock returned -25.9% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.