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Were Hedge Funds Right About Buying Shopify Inc (SHOP)?

Asma UL Husna

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the second quarter. We get to see hedge funds' thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Shopify Inc (NYSE:SHOP).

Shopify Inc (NYSE:SHOP) investors should be aware of an increase in activity from the world's largest hedge funds recently. Our calculations also showed that SHOP isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

SHOP_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a look at the fresh hedge fund action surrounding Shopify Inc (NYSE:SHOP).

Hedge fund activity in Shopify Inc (NYSE:SHOP)

At the end of the second quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 4% from the previous quarter. The graph below displays the number of hedge funds with bullish position in SHOP over the last 16 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Lone Pine Capital 2015 Q2 Investor Letter

More specifically, Lone Pine Capital was the largest shareholder of Shopify Inc (NYSE:SHOP), with a stake worth $451.1 million reported as of the end of March. Trailing Lone Pine Capital was Abdiel Capital Advisors, which amassed a stake valued at $357 million. SCGE Management, Whale Rock Capital Management, and Citadel Investment Group were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, key hedge funds were leading the bulls' herd. Two Sigma Advisors, managed by John Overdeck and David Siegel, initiated the most outsized position in Shopify Inc (NYSE:SHOP). Two Sigma Advisors had $172.2 million invested in the company at the end of the quarter. James Crichton's Hitchwood Capital Management also made a $42 million investment in the stock during the quarter. The other funds with new positions in the stock are Marc Lisker, Glenn Fuhrman and John Phelan's MSDC Management, Joel Greenblatt's Gotham Asset Management, and Dmitry Balyasny's Balyasny Asset Management.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Shopify Inc (NYSE:SHOP) but similarly valued. These stocks are Nutrien Ltd. (NYSE:NTR), Xcel Energy Inc (NASDAQ:XEL), Mercadolibre Inc (NASDAQ:MELI), and Alcon Inc. (NYSE:ALC). This group of stocks' market caps are similar to SHOP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position NTR,22,211755,-3 XEL,18,496716,2 MELI,52,3846834,11 ALC,18,454484,18 Average,27.5,1252447,7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $1252 million. That figure was $2201 million in SHOP's case. Mercadolibre Inc (NASDAQ:MELI) is the most popular stock in this table. On the other hand Xcel Energy Inc (NASDAQ:XEL) is the least popular one with only 18 bullish hedge fund positions. Shopify Inc (NYSE:SHOP) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on SHOP, though not to the same extent, as the stock returned 3.8% during the third quarter and outperformed the market.

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

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