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Was The Smart Money Right About Piling Into Zillow Group Inc (Z)?

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We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Melvin Capital's recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Zillow Group Inc (NASDAQ:Z).

Zillow Group Inc (NASDAQ:Z) shareholders have witnessed an increase in support from the world's most elite money managers in recent months. Zillow Group Inc (NASDAQ:Z) was in 83 hedge funds' portfolios at the end of December. The all time high for this statistic was previously 69. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that Z isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 197% since March 2017 and outperformed the S&P 500 ETFs by more than 124 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.


Philippe Laffont of Coatue Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, auto parts business is a recession resistant business, so we are taking a closer look at this discount auto parts stock that is growing at a 196% annualized rate. We go through lists like the 15 best micro-cap stocks to buy now to identify the next stock with 10x upside potential. 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. With all of this in mind let's take a gander at the key hedge fund action encompassing Zillow Group Inc (NASDAQ:Z).

Do Hedge Funds Think Z Is A Good Stock To Buy Now?

Heading into the first quarter of 2021, a total of 83 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 20% from the third quarter of 2020. By comparison, 37 hedge funds held shares or bullish call options in Z a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

The largest stake in Zillow Group Inc (NASDAQ:Z) was held by SRS Investment Management, which reported holding $1010.7 million worth of stock at the end of December. It was followed by ARK Investment Management with a $841.3 million position. Other investors bullish on the company included Coatue Management, D E Shaw, and Zevenbergen Capital Investments. In terms of the portfolio weights assigned to each position Kuvari Partners allocated the biggest weight to Zillow Group Inc (NASDAQ:Z), around 20.25% of its 13F portfolio. Ancient Art (Teton Capital) is also relatively very bullish on the stock, setting aside 16.97 percent of its 13F equity portfolio to Z.

There weren't any hedge funds initiating brand new positions in the stock during the fourth quarter.

Let's also examine hedge fund activity in other stocks similar to Zillow Group Inc (NASDAQ:Z). We will take a look at LyondellBasell Industries NV (NYSE:LYB), Phillips 66 (NYSE:PSX), XPeng Inc. (NYSE:XPEV), Ball Corporation (NYSE:BLL), Schlumberger Limited. (NYSE:SLB), Copart, Inc. (NASDAQ:CPRT), and Datadog, Inc. (NASDAQ:DDOG). This group of stocks' market valuations are similar to Z's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LYB,27,682905,-4 PSX,26,191517,-1 XPEV,30,820952,4 BLL,44,944165,11 SLB,50,1226025,-3 CPRT,46,1137710,-10 DDOG,52,2899490,10 Average,39.3,1128966,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.3 hedge funds with bullish positions and the average amount invested in these stocks was $1129 million. That figure was $5812 million in Z's case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand Phillips 66 (NYSE:PSX) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks Zillow Group Inc (NASDAQ:Z) is more popular among hedge funds. Our overall hedge fund sentiment score for Z is 90. 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. Our calculations showed that top 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 12.3% in 2021 through April 19th and still beat the market by 0.9 percentage points. Unfortunately Z wasn't nearly as popular as these 30 stocks and hedge funds that were betting on Z were disappointed as the stock returned 2.5% since the end of the fourth quarter (through 4/19) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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

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