U.S. Markets open in 1 hr 32 mins

How Microsoft Corporation (MSFT) Compared Against Top Hedge Fund Stocks in 2019

Asma UL Husna

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 10 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 Microsoft Corporation (NASDAQ:MSFT).

Is Microsoft Corporation (NASDAQ:MSFT) a buy, sell, or hold? Prominent investors are in a bullish mood. The number of bullish hedge fund bets increased by 6 in recent months. Our calculations also showed that MSFT ranked #2 among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). MSFT was in 173 hedge funds' portfolios at the end of the third quarter of 2019. There were 167 hedge funds in our database with MSFT holdings at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 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' 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.

[caption id="attachment_26088" align="aligncenter" width="508"] Chase Coleman of Tiger Global[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind we're going to take a look at the key hedge fund action encompassing Microsoft Corporation (NASDAQ:MSFT).

What does smart money think about Microsoft Corporation (NASDAQ:MSFT)?

At Q3's end, a total of 173 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards MSFT over the last 17 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Fisher Asset Management was the largest shareholder of Microsoft Corporation (NASDAQ:MSFT), with a stake worth $2969.5 million reported as of the end of September. Trailing Fisher Asset Management was Eagle Capital Management, which amassed a stake valued at $2625.1 million. Tiger Global Management, AQR Capital Management, and Adage Capital Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Joho Capital allocated the biggest weight to Microsoft Corporation (NASDAQ:MSFT), around 21.93% of its 13F portfolio. Duquesne Capital is also relatively very bullish on the stock, setting aside 21.61 percent of its 13F equity portfolio to MSFT.

As industrywide interest jumped, specific money managers were breaking ground themselves. Cryder Capital, managed by Ferdinand Groos, initiated the biggest position in Microsoft Corporation (NASDAQ:MSFT). Cryder Capital had $90.2 million invested in the company at the end of the quarter. Michael Sidhom's Immersion Capital also initiated a $84.1 million position during the quarter. The other funds with new positions in the stock are David Fiszel's Honeycomb Asset Management, Gregg Moskowitz's Interval Partners, and Joseph Samuels's Islet Management.

Let's now take a look at 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). All of these stocks' market caps resemble MSFT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AAPL,111,64813263,16 AMZN,168,22964901,5 GOOGL,147,12321541,18 GOOG,136,15584517,10 Average,140.5,28921056,12.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 140.5 hedge funds with bullish positions and the average amount invested in these stocks was $28921 million. That figure was $26910 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 111 bullish hedge fund positions. Compared to these stocks Microsoft Corporation (NASDAQ:MSFT) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on MSFT as the stock returned 57.3% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

Related Content