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Hedge Funds Have Never Been This Bullish On Microsoft Corporation (MSFT)

Reymerlyn Martin

In this article we will take a look at whether hedge funds think Microsoft Corporation (NASDAQ:MSFT) is a good investment in the middle of the coronavirus market crash. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Microsoft Corporation (NASDAQ:MSFT) investors should be aware of an increase in support from the world's most elite money managers of late. MSFT was in 235 hedge funds' portfolios at the end of March. There were 189 hedge funds in our database with MSFT holdings at the end of the previous quarter. Our calculations also showed that MSFT ranked #2 among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 44 percentage points since March 2017 (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_30647" align="aligncenter" width="400"] Boykin Curry of Eagle Capital[/caption]

Boykin Curry EAGLE CAPITAL MANAGEMENT

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we asked astrophysicist Neil deGrasse Tyson about Tesla, Elon Musk, and his top stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we're going to take a look at the fresh hedge fund action surrounding Microsoft Corporation (NASDAQ:MSFT).

How are hedge funds trading Microsoft Corporation (NASDAQ:MSFT)?

Heading into the second quarter of 2020, a total of 235 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MSFT over the last 18 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.

The largest stake in Microsoft Corporation (NASDAQ:MSFT) was held by Fisher Asset Management, which reported holding $3383.9 million worth of stock at the end of September. It was followed by Eagle Capital Management with a $2325 million position. Other investors bullish on the company included Arrowstreet Capital, AQR Capital Management, and Tiger Global Management LLC. In terms of the portfolio weights assigned to each position Thrive Capital allocated the biggest weight to Microsoft Corporation (NASDAQ:MSFT), around 58.15% of its 13F portfolio. Joho Capital is also relatively very bullish on the stock, earmarking 30.16 percent of its 13F equity portfolio to MSFT.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls' herd. Melvin Capital Management, managed by Gabriel Plotkin, created the largest position in Microsoft Corporation (NASDAQ:MSFT). Melvin Capital Management had $426.8 million invested in the company at the end of the quarter. Eric W. Mandelblatt and Gaurav Kapadia's Soroban Capital Partners also initiated a $412.2 million position during the quarter. The following funds were also among the new MSFT investors: Tim Hurd and Ed Magnus's BlueSpruce Investments, Daniel Sundheim's D1 Capital Partners, and William von Mueffling's Cantillon Capital Management.

Let's now review hedge fund activity in other stocks similar to Microsoft Corporation (NASDAQ:MSFT). We will take a look at Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), and Alphabet Inc (NASDAQ:GOOG). This group of stocks' market values are similar to MSFT's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AAPL,123,74756340,4 AMZN,251,32864433,49 GOOGL,167,11083440,4 GOOG,147,15254756,-1 Average,172,33489742,14 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 172 hedge funds with bullish positions and the average amount invested in these stocks was $33490 million. That figure was $31439 million in MSFT's case. Amazon.com, Inc. (NASDAQ:AMZN) is the most popular stock in this table. On the other hand Apple Inc. (NASDAQ:AAPL) is the least popular one with only 123 bullish hedge fund positions. Microsoft Corporation (NASDAQ:MSFT) is not the most popular stock in this group but that's only because Amazon is the #1 stock. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 7.9% in 2020 through May 22nd but still beat the market by 15.6 percentage points. Hedge funds were also right about betting on MSFT, though not to the same extent, as the stock returned 16.7% during the first two months of the second quarter (through May 22nd) and outperformed the market as well.

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

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