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Was The Smart Money RIght About Dumping Spotify Technology S.A. (SPOT)?

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Reymerlyn Martin
·6 min read
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In this article we are going to use hedge fund sentiment as a tool and determine whether Spotify Technology S.A. (NYSE:SPOT) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Spotify Technology S.A. (NYSE:SPOT) investors should pay attention to a decrease in support from the world's most elite money managers recently. Spotify Technology S.A. (NYSE:SPOT) was in 36 hedge funds' portfolios at the end of June. The all time high for this statistics is 67. Our calculations also showed that SPOT isn't among the 30 most popular stocks among hedge funds (click for Q2 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.

To most stock holders, hedge funds are assumed to be unimportant, outdated financial vehicles of yesteryear. While there are over 8000 funds with their doors open today, Our experts choose to focus on the upper echelon of this group, about 850 funds. These money managers control most of the hedge fund industry's total asset base, and by keeping an eye on their highest performing stock picks, Insider Monkey has found numerous investment strategies that have historically defeated the market. Insider Monkey's flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Chase Coleman of Tiger Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's take a glance at the key hedge fund action regarding Spotify Technology S.A. (NYSE:SPOT).

How are hedge funds trading Spotify Technology S.A. (NYSE:SPOT)?

At the end of June, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. By comparison, 42 hedge funds held shares or bullish call options in SPOT a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Spotify Technology S.A. (NYSE:SPOT) was held by Tiger Global Management LLC, which reported holding $822.5 million worth of stock at the end of June. It was followed by Renaissance Technologies with a $325.6 million position. Other investors bullish on the company included Citadel Investment Group, Tremblant Capital, and Eminence Capital. In terms of the portfolio weights assigned to each position Marcho Partners allocated the biggest weight to Spotify Technology S.A. (NYSE:SPOT), around 20.03% of its 13F portfolio. Voleon Capital is also relatively very bullish on the stock, dishing out 14.07 percent of its 13F equity portfolio to SPOT.

Judging by the fact that Spotify Technology S.A. (NYSE:SPOT) has experienced falling interest from the entirety of the hedge funds we track, it's safe to say that there is a sect of money managers that elected to cut their entire stakes last quarter. It's worth mentioning that Robert M. P. Luciano's VGI Partners cut the biggest position of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $97.5 million in stock, and Brandon Haley's Holocene Advisors was right behind this move, as the fund dumped about $30.8 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 4 funds last quarter.

Let's go over hedge fund activity in other stocks similar to Spotify Technology S.A. (NYSE:SPOT). We will take a look at Dollar General Corp. (NYSE:DG), Barrick Gold Corporation (NYSE:GOLD), Equinor ASA (NYSE:EQNR), Lam Research Corporation (NASDAQ:LRCX), The Progressive Corporation (NYSE:PGR), Square, Inc. (NYSE:SQ), and Relx PLC (NYSE:RELX). All of these stocks' market caps are closest to SPOT's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DG,67,2296237,7 GOLD,52,3360658,-2 EQNR,10,237155,-1 LRCX,62,2537918,8 PGR,50,1147531,-1 SQ,66,3487480,10 RELX,6,118963,1 Average,44.7,1883706,3.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 44.7 hedge funds with bullish positions and the average amount invested in these stocks was $1884 million. That figure was $1882 million in SPOT's case. Dollar General Corp. (NYSE:DG) is the most popular stock in this table. On the other hand Relx PLC (NYSE:RELX) is the least popular one with only 6 bullish hedge fund positions. Spotify Technology S.A. (NYSE:SPOT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SPOT is 41.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 23% in 2020 through October 30th and surpassed the market again by 20.1 percentage points. Unfortunately SPOT wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SPOT investors were disappointed as the stock returned -7.1% since the end of June (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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