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Is Unity Software Inc. (U) Going to Burn These Hedge Funds?

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Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 900 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Unity Software Inc. (NYSE:U).

Unity Software Inc. (NYSE:U) investors should pay attention to a decrease in hedge fund sentiment of late. Unity Software Inc. (NYSE:U) was in 29 hedge funds' portfolios at the end of June. The all time high for this statistic is 39. Our calculations also showed that U isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 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.

Brad Gerstner Altimeter Capital
Brad Gerstner Altimeter Capital

Brad Gerstner of Altimeter Capital

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 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let's analyze the fresh hedge fund action surrounding Unity Software Inc. (NYSE:U).

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

Heading into the third quarter of 2021, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -26% from the first quarter of 2020. By comparison, 0 hedge funds held shares or bullish call options in U a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Silver Lake Partners held the most valuable stake in Unity Software Inc. (NYSE:U), which was worth $4478.8 million at the end of the second quarter. On the second spot was ARK Investment Management which amassed $1297.1 million worth of shares. D1 Capital Partners, Altimeter Capital Management, and Jasper Ridge Partners 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 Silver Lake Partners allocated the biggest weight to Unity Software Inc. (NYSE:U), around 29.02% of its 13F portfolio. Marcho Partners is also relatively very bullish on the stock, dishing out 9.03 percent of its 13F equity portfolio to U.

Because Unity Software Inc. (NYSE:U) has witnessed declining sentiment from the smart money, logic holds that there were a few hedge funds that slashed their entire stakes heading into Q3. At the top of the heap, Andreas Halvorsen's Viking Global dropped the biggest investment of all the hedgies tracked by Insider Monkey, totaling an estimated $141.4 million in stock, and Greg Poole's Echo Street Capital Management was right behind this move, as the fund said goodbye to about $56.7 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 10 funds heading into Q3.

Let's now review hedge fund activity in other stocks similar to Unity Software Inc. (NYSE:U). We will take a look at MPLX LP (NYSE:MPLX), Orange SA (NYSE:ORAN), TELUS Corporation (NYSE:TU), Zillow Group Inc (NASDAQ:Z), ANSYS, Inc. (NASDAQ:ANSS), Fomento Económico Mexicano, S.A.B. de C.V. (NYSE:FMX), and SVB Financial Group (NASDAQ:SIVB). This group of stocks' market valuations resemble U's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MPLX,11,115640,3 ORAN,3,13039,1 TU,13,215295,-5 Z,76,5243852,-6 ANSS,46,1459350,13 FMX,13,904303,-2 SIVB,49,1038598,0 Average,30.1,1284297,0.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.1 hedge funds with bullish positions and the average amount invested in these stocks was $1284 million. That figure was $7264 million in U's case. Zillow Group Inc (NASDAQ:Z) is the most popular stock in this table. On the other hand Orange SA (NYSE:ORAN) is the least popular one with only 3 bullish hedge fund positions. Unity Software Inc. (NYSE:U) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for U is 35.1. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. A small number of hedge funds were also right about betting on U as the stock returned 28.4% since the end of the second quarter (through 10/15) and outperformed the market by an even larger margin.

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